Nick Fink, CEO of Fortune Brands Home & Security, says his company continues to evolve the way it incorporates Environmental, Social and Governance (ESG) principles into M&A diligence. In his company’s case, ESG has a history of being considered synergistic.
“We do a lot of modeling and we do a lot of business-case building of how we're going to drive value,” Fink says. “But one thing we probably don't talk about enough is the ESG synergy that we bring.”
For instance, on the governance side, one of the first things Fortune Brands Home & Security tends to do after an acquisition is raise the acquiree’s safety standards. In one case, the company expended capital to upgrade an acquiree’s safety standards and lowered its recorded incidents rate by 68 percent.
However, Fink expects ESG will increasingly become a part of his company’s due diligence.
“Historically, we've been looking for risk factors, we’ve been looking for value creation,” he says. “A company’s ESG track record — people looked for environmental issues for a long time. But the broader environmental, social and governance aspects of a business will become more important as people do diligence, and that's going to apply to companies of any size, public or private.”
Amantia Muhedini, a sustainable investing strategist at UBS, says ESG is becoming more mainstream. In practice, that means it's becoming embedded into investment framework.
“This is something that investors have done historically, as part of regular investment due diligence,” Muhedini says. “But now to say, among the list of things that I will check are what are the company's human capital management policies, essentially. And now we have a formalizing — still getting there — but framework of looking at it.
None of these ESG issues are likely to be the single driving factor in an investment or acquisition decision, she says. But, much like in Fink’s example of a capital investment to bring a company up a certain employee safety standard, it can affect a rate of return. ESG, Muhedini says, is a way for business owners to start thinking about how to prepare for these types of questions and this type of diligence.
Fink says his company has considered environmental testing, remediation and human capital safety for a long time. But he thinks that will extend further.
“Once companies have to really start understanding their carbon footprint and are reporting against their carbon footprint and their progress against offsetting their carbon footprint, you're going to want to know before you bring a business under your wing and into your umbrella what impact is that going to have?” he says.
While ESG isn’t a major factor for most at the moment, it's evolving very rapidly and it may get there.
“If they have no idea, well you're just one step further behind in what you have to understand to be able to measure and get some degree of confidence about it,” Fink says.
Fink and Muhedini, along with UBS Chicago Market Head Michael Gatewood, kicked off this week’s Chicago Smart Business Dealmakers Conference with their Rountable discussion titled: Is ESG the next big thing for middle-market M&A? Hit play on the video above to catch the full conversation.