Special-purpose acquisition companies (SPACs) are gaining traction as investors lay increasing emphasis on environmental, social and governance (ESG) aspects. SPACs serve as vehicles for companies to fulfil their sustainable goals faster. This article explores the convergence of ESG and SPACs in the context of sustainability and mergers.
What are SPACs?
SPACs are dummy companies created for funding acquisitions/mergers via initial public offerings (IPOs). These companies, usually created to acquire other companies. SPACs are public firms that help the target company become public faster, compared to the normal route.
Role of ESG in M&A
ESG has become an essential factor in M&As given the growing awareness among investors and customers on sustainability. When companies decide to pursue M&A, one of the elements they consider is the sustainable impact of the acquisition. Owing to the changing regulations, a company’s green initiatives are considered essential, and they help in attracting the investors.
Confluence of ESG and SPACs
This emerging trend is gaining pace as SPACs with ESG focus attract more investors. Almost 95% of the SPACs focusing on ESG were formed after 2019. Companies involved in sustainable initiatives have become more popular among investors and consumers. Also, they tend to have better reputation and higher customer trust. The deal may not turn the target company completely sustainable but will likely provide investors information on the company’s steps towards becoming more sustainable which would motivate ESG focused investors to invest in the merged entity.
Points to consider before SPAC mergers:
- Core values: The companies should discuss their motives and values as an organization. This becomes more important when the merger is ESG-driven, as both the companies’ shareholders must agree on a common set of values for the merged entity.
- Strategic fit: Normally, companies consider ESG impacts (such as carbon footprint, social impact and governance issues) during M&A. However, when M&A are centred on primarily ESG activities, the acquirer’s and the acquiree’s policies must be in sync. If there is a positive gap, between sustainability profiles of the acquirer and the target company it can act as synergies between both the companies. In the deal. However, a significant difference between both the companies’ sustainability profiles can hamper the deal.
- Due diligence: In the due diligence period, it is important to assess whether the SPAC has relevant experience in acquiring a company. Furthermore, the target company should brace itself for questions not only on finance, accounting and taxation but also on ESG aspects. The target company would be required to furnish supporting documents with proper disclosure.
- Reporting clarity: It is important that disclosure expectations are set from the start. The companies should be transparent regarding their ESG initiatives and their social impact. This helps the companies take decisions faster and helps regulators assess their ESG performance.
- Shared goals: It is imperative that both the parties agree on common goals to achieve long-term growth, especially in the ESG domain. There should be a road map to guide the merged company during uncertainties, business risk and changing business dynamics.
- Deal completion: As per SSRN’s research paper titled ‘Performance of ESG SPACs’, out of the total SPACs announced between 2003 to 2022, only 50% of them were completed. This highlights the fallout rate is higher in such deals. Hence, leadership of both the companies should be cautious before entering into such transactions and conduct proper diligence before announcing such mergers.
ESG-based SPAC cases
- Sustainability-focused SPACs: Some SPACs are created solely around ESG themes. They target companies (such as small companies and family offices) that want to raise funds from the public in a short span, which SPACs can make possible. Since listed companies are popular, they face less information asymmetry issues in the market, making it easier for them to receive external funds.
- Energy-efficient companies: SPACs are becoming increasingly popular among energy-intensive companies such as electric vehicle manufacturers, charging station firms and energy-saving software producers. Through SPAC mergers, these companies can get quick and easy access to external funds via IPO, helping them contribute to sustainable initiatives.
Roadblocks and challenges
SPACs are an effective channel for companies to become public. Firms that participate in such mergers must fulfil their ESG claims that drove the merger and not resort to greenwashing. Moreover, ESG-focused mergers have come under the radar of regulators, and investors scrutinise regularly the claims made by the companies. Hence, the acquirers should ensure that both the companies take genuine steps towards environment sustainability.
Road ahead
ESG-based SPACs will likely be a permanent feature in the M&A space in the future. These mergers are helpful because they help companies inform their stakeholders about their future targets and their strategies to achieve them, enhancing public confidence in them. Companies evolving in the ESG space require large amounts of capital, and SPACs are an effective medium to become public. However, companies should be cautious while pursuing such mergers as the synergies of both the parties, along with their sustainability goals, must align. Furthermore, companies must adhere to the regulations and be transparent in their disclosures.
