As the investing world shifts its focus towards climate-focused investments, Boston Consulting Group (BCG) stated in an India M&A report that "green investing" indicates that "green deals" deliver 6.5x greater relative total shareholder return compared to "non-green deals" over two years.
BCG stated that returns can be higher because companies with a focus on sustainability can create business value through multiple levers, such as better access to financing, avoiding carbon taxes and other regulatory risks, cost savings from decarbonization-related efficiency gains, and volume potential from more climate-friendly products.
The volume and value of green deals has increased over the past decade, with a steep rise in 2021. The transition to clean energy is the main driver of deals.
The transition to clean energy is the primary force driving the surge in "green deals." With the increasing need to address climate change and other sustainability issues, investors are looking for opportunities to allocate capital to companies working towards a sustainable future. As such, the demand for deals in the clean energy sector has significantly increased, driving the growth of green deals as an attractive investment theme.
BCG analysed a total of 466 green M&A transactions in India, including pending, partly completed, completed, unconditional, and withdrawn deals announced from 1 January 1, 2005 to 31 December, 2021, with no transaction size threshold. Self-tenders, recapitalizations, exchange offers, repurchases, privatizations, and spinoffs were excluded.
Green investments can take many forms, such as investing in renewable energy companies, companies with a low carbon footprint, or those that prioritize social and environmental responsibility in their operations. The main idea is to allocate capital towards companies that are actively working towards a sustainable future, rather than those that contribute to environmental degradation and social harm.
In recent years, green investing has gained popularity due to the need to address issues such as climate change, biodiversity loss, and social inequality.
"Irrespective of the company's current scale and maturity, M&A can be an important lever to accelerate the growth of your core business, tap into adjacent revenue pools, and develop long-term capabilities. Clear strategic and financial objectives are key to identifying potential targets best suited for your organization and portfolio and having high conviction in the business case," said Kanchan Samtani, managing director and senior partner, BCG India.
The report highlighted the need for prospective buyers to act quickly and decisively as the opportunity to acquire select assets at corrected valuations is limited.
As economic uncertainty decreases, valuations are likely to rebound. Therefore, it is an opportune time for corporate buyers to pursue strategic deals and make opportunistic investments that may have been delayed due to highly inflated valuations across the board, the report stated.