The clamor among Asia-Pacific (APAC) investors for environmental, social and governance (ESG)-compliant companies is intensifying, hitting fever pitch in 2021, with a record-breaking value of ESG-related M&A deals signed in the region, even if the deal count remained broadly in line with that of the past decade.

ESG deals to the tune of USD 69bn were penned in 2021, up 102% on their five-year average, with China (USD 42bn), India (USD 11bn) and Australia (USD 8bn) taking center stage. While US-based global banks such as Goldman Sachs and BofA Securities dominated fees from the region, the top local players were CITIC Securities, China International Capital Corporation (CICC), HSBC and Nomura.

“Multiple crises over the past few years and COVID-19 have … moved ESG issues from being on the periphery of strategic concern or a tick in the box exercise to taking on a central theme across core businesses strategies,” said Kushal Chadha, Asia-Pacific ESG Deals & Private Equity Leader, PwC Australia.

This historical shift in ESG-investing is driven by several factors: a change in investor appetite to invest in companies with long-term business resilience, a thematic hunger for value-based investing imbued by a younger global demographic, and because of corporate recognition that an ESG business model could yield higher returns in the long term, Chadha continued.

“ESG-compliant investments in India are increasingly becoming profitable as well,” says Bhavesh Shah, Managing Director at Mumbai-based Equirus Capital. “Indian healthcare firms, e.g., are remodeling their business to make ESG a long-term and sustainable strategy rather than just operating within the framework of India’s Corporate Social Responsibility (CSR) Act.”

Carbon copiers

In Asia-Pacific, Chinese state-owned banks, Australian private-equity (PE) firms, Japanese energy players, and Indian conglomerates are taking the lead in searching for ESG-compliant assets, striving to find a balance between risk and return. Competition for good quality businesses is fierce and the sector is not without its pitfalls – with no uniform accounting standard for ESG companies, countries and corporates alike adopt and adapt their own methodology for inclusion.
According to one China-based investor, the Chinese government and companies tend to focus more on the ‘E’ of ESG, a move actively tied to Beijing’s pledge to become carbon neutral by 2060. The country is less bound to hitting GDP targets in its 14th five-year plan, allowing companies more flexibility to pursue options with lower carbon footprints.
Chinese ESG deals are frequently driven by state-owned behemoths increasing their stake in subsidiaries, such as State Development and Investment, which boosted its interest in electric power generator SDIC Power Holdings last year for around USD 19.9bn, the region’s largest ESG deal to date.
Meanwhile, potential targets, under pressure from investors, regulators and the public, could be guilty of ‘greenwashing’ – or appearing more ESG compliant than they are – to mitigate business risks and attract financing. According to a 2021 PwC report on responsible PE investment globally, about 56% of PE firms have turned down investments citing ESG concerns or refused to enter general partner agreements.

A greener future

Despite the challenges, ESG investing is not a fad. Deals in the space should continue to blossom in 2022, as more institutions, corporates and PE firms hire dedicated ESG professionals, limited partners (LPs) allocate more capital to the space, and companies recognize the long-term reputational and bottom-line benefits of ESG compliance.
“We expect to see a continued trend of investment into clean energy, food and agri, healthcare, technology (climate-tech, agri-tech, health-tech, prop-tech), waste management and automation in industrials,” continued PwC’s Chadha. In China, a booming surge of renewable energy M&A could eventually replace the dominance of oil and gas. Investment opportunities can also be found in privately-held targets in the space, including Chinese intelligent photovoltaic (PV) station solutions provider PV soul, which is seeking strategic investors from at home and in Europe.
In India, renewable energy platform Sprng Energy, valued at USD 2bn, has attracted bids from a handful of global energy groups including global steel maker ArcelorMittal [NYSE:MT], Adani Group, Royal Dutch Shell [NYSE:RDS.A], Sembcorp Energy and CPPIB. Meanwhile, Tata Power [BOM:500400] has been in talks with Temasek Holdings, General Atlantic, and CPPIB to raise up to USD 600m-700m for its renewable energy business.
Looking at the pipeline of deals, both in terms of value and volume, one thing is clear: “ESG is not just an investment theme,” said Chadha. “It is the new way of doing business.”