ESG backlash: Climate-change dealmaking plunges amid political pushback

Data Insight Dealspeak 20 September

ESG backlash: Climate-change dealmaking plunges amid political pushback

Renewable energy deals are in free fall as cyclical factors keep potential sellers in capital-raising mode and sentiment against environmental, social, and governance (ESG) investing gains traction.

The number of ESG deals halved between 2015 and 2021, and is on pace to drop further this year, according to Dealogic, which categorizes a deal as ESG if the target is involved in wind, solar, hydroelectric, biomass, or other forms of renewable energy. 

In 2015, there were 166 such deals, and that number dropped every year through 2021, which saw 82. This year so far has had 51 — on pace for another decline with a finish in the 70s.

Reasons for the decline are manifold. The long development horizon has kept many renewable energy assets off the market recently, said Susan Mac Cormac, partner at Morrison Foerster. Easy access to mounds of investor dollars set aside for combating climate change also means they can stay in capital-raising mode for years to come.

Plus, not all renewable energy companies make for attractive buys, Mac Cormac added. Their climate impact may make them seem a surefire ESG play, but several have poor internal corporate governance practices.

Anti-ESG sentiment

More recently, the concept of “anti-ESG” is taking hold, at least in public debate. At the US state level, government officials largely from the conservative Republican party have pressed asset managers like BlackRock and ratings firms such as S&P Global about whether efforts to address climate change come at the expense of financial returns. Florida and Texas, two of the largest US states, have taken steps to bar ESG criteria in their state-run investment funds.

Funds have attempted to take advantage of the simmering anti-ESG sentiment. One is Strive Asset Management’s publicly traded US Energy ETF, which has raised hundreds of millions in investor dollars. To be sure, these funds are still small compared with the trillions of dollars wielded by the asset managers facing criticism for their ESG and impact investments.

Such anti-ESG investments could eventually help weed out ‘greenwashing’ and other problematic aspects of the ESG investing framework, Mac Cormack noted.

The US Securities and Exchange Commission also will require ESG-focused funds to better disclose how an investment fits that criteria.

Companies that cannot back up their impact claims could “be subject to real risk because they haven’t actually done the work,” said Mac Cormack.

A Mergermarket  analysis of press releases shows that an increasingly higher proportion of transactions publicly tout their ESG and sustainability benefits year over year – from 1.3% of all deals in 2017 to 5.2% in the year to date.  That trend, however, has reversed since May.

Not dead, just dozing

Dealmaking in renewables should jump back up soon, particularly after President Joe Biden last month signed into law a USD 369bn climate action bill, said one sector M&A attorney.

Renewable energy targets identified by Dealogic’s LTI data — which predicts what sponsor-backed assets are the most likely to see an exit event in the next 12-plus months — include CPP Investments-owned Pattern Energy, Boyne Capital Partners-owned Pilot Power Group, Capital Dynamics-owned 8point3 Energy Partners and 8minute Solar Energy.

Notably, though, only one has a score above 60 (on a scale up to 100). For all sectors, there are 305 US companies in Dealogic’s LTI data above that threshold.

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