Disruption to old ways of doing business, the climate emergency, incoming regulations, and cybersecurity threats are increasing scrutiny on corporate future-proofing, according to panellists at Mergermarket’s Corporate Development Forum Europe 2023 last week in London.
Companies typically watch the near future, according to Alberto Onetti, chairman of innovation advisory firm Mind the Bridge, who was speaking at a fireside chat on cybersecurity and tech. However, exponential growth in technologies like generative artificial intelligence (AI) and quantum computing means disruption is hanging over their heads, he said.
Many need to disrupt themselves before anyone else disrupts their business models, Onetti said. Working with startups is a way to “widen their peripheral vision,” so they can find what might kill their model and embrace it, he said.
Taking on start-ups as clients first, with a view to trigger M&A later, is the best way to approach the issue, Onetti said. Companies can identify their internal needs, set up a pilot scheme by scouting a wide pool of tech companies, and if it works, scale up the collaboration internally.
Any resulting acquisition is a way of bringing talent into the group. Onetti said, as well as buying the future rather than past performance, he added.
Future-proofing is also core to environmental investing, according to Tanja Gihr, managing director and head of environmental, social and governance (ESG) advisory for EMEA at Barclays [LON: BARC], speaking on a panel on climate disruption.
ESG is often core catalyst for M&A, the panellists said. In the energy sector, around 70% of ESG objectives are met through acquisitions, according to Emilio Zito, group head of M&A and investments, EDF Invest, and head of investor relations at parent company EDF [EPA: EDF].
Companies that engage in M&A also tend to have higher ESG ratings, Philip Whitchelo, chief marketing and strategy officer, Sterling Technology, said in a panel on the future of corporate development, adding that a higher frequency of activity means companies are re-rated more often.
Regulations are also changing fast in response to the climate emergency. The Task Force on Climate-related Financial Disclosures (TCFD), which was created by the Financial Stability Board (an international body) is one to watch, according to Conor Kehoe, a member of the G7 Impact Taskforce.
The TCFD will act as a climate stress test for corporates, Kehoe said, adding that the new regulations are future-oriented by assessing, for instance, different climate scenarios, rather than looking at past performance.
New taxes are also likely to emerge as a key tool in fighting climate change, Kehoe said.
Many of the incoming regulations will involve the difficult task of data-gathering across supply chains, Kehoe said, adding that ratings agencies are gradually converging on climate risk assessment.
Analyst information on scope 1 emissions is generally reliable at the moment, but that is less the case with scope 2 and the understanding of scope 3 is even worse, EDF’s Zito said. Scope 1 and 2 emissions are owned or controlled by a company, while scope 3 are generated as a consequence of its activities.
The energy transition will also throw up new ways of doing business, Kehoe and Zito said, pointing to new opportunities for private capital. Kehoe would like to see more joint ventures between corporates and private capital as institutional investors prefer to be limited partners (LPs) in impact funds than make investments into ESG-linked equities because the capital doesn’t disappear into a black box, he said.
The UK’s Co-operative Group’s recent sale of its petrol station forecourts to peer Asda, was important to future-proofing its Net Zero goals as it removed roal fuel from its carbon emissions, said Tim Cutting, director of corporate development.
Hackers and scrutiny
Around 450,000 malware programs are released every day, according to Kristin Umbach, head of corporate development at Swiss IT Security Group. This makes it a question of “when not if” a company gets hacked, she said.
Hacks are expensive and some can be critical, with bankruptcy a worst-case scenario, Umbach said. Cybersecurity due diligence involves identifying risks like firewalls and access and bringing them into the model, she said, making this central to the governance part of ESG.
However, it is a mistake for corporates to hold startups to the same governance standards as more conventional businesses when the time comes to trigger M&A, Onetti said.
The increasing use of AI tools in due diligence can also lead to future problems, Whitchelo said, adding that it is difficult to predict the implications of training AI models on confidential data.
Another example of an emergent risk comes from the UK’s Co-operative Group, which has long employed an ethical screening tool over potential partners when it sells assets, said Cutting. “I think we will see more of this,” he said, adding that corporates be more accountable for who they decide to sell to.
Although in general there is less reporting of ESG issues in the US, 10-k forms impose personal liabilities for correct reporting on executives in a way that is less common in Europe, Kehoe said.
At the moment, it is easier to measure environmental risks than social risks, Gihr said. However, companies that don’t have enough female directors, for example, will increasingly find themselves being scored down by analysts, she said.
Finally, Kehoe said that he is looking forward to the day that providing stable well-paying jobs is considered a core part of a company’s social obligations. He pointed to the Biden administration’s Inflation Reduction Act as incentivising companies to create good jobs in states such as West Virginia.
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