Fast-tracking green growth: How dealmaking can accelerate the transition to net zero

By Chris Temple and Roberta Carter

Pressure to accelerate net zero transformation is building as new sustainability and wider environmental, social and governance (ESG) reporting demands put planning and progress under an auditable public spotlight.

For frontrunners with a track record of incorporating sustainability considerations into dealmaking, this is an opportunity to realise the share price benefits from your investments as ESG becomes an ever more critical element of corporate valuation. But failure to live up to your promises could put your business at risk of both a damaging credibility gap and higher cost of capital.

Accelerating transformation through transactions

These new reporting demands and the stakeholder pressure that surrounds them are providing strong impetus for deal activity – our research reveals that appetite for net zero-driven deals is strongest in sectors facing greater pressure to decarbonise. Businesses are reviewing their operations and seeking out access to the talent and technology needed to accelerate decarbonisation. The results can be seen in transactions ranging from the acquisition of carbon capture and home energy efficiency capabilities, to partnerships tackling clean energy and low emission production techniques.

Market opening up for carbon-intensive assets

The market for carbon-intensive assets is shifting as more companies look to divest from these operations due to the push for net zero emissions and the risk of stranded assets. Although the transition speeds vary and may take decades, significant capital is still targeting these assets. Some buyers see revenue potential in meeting current demand while others exit the market, adopting a 'last man standing' strategy. This creates a complex landscape where balancing immediate financial gains with long-term sustainability goals is crucial.

Opportunity to reinvent your business model

But seeing net zero transformation as simply a necessary cost would leave a significant amount of value on the table. Dealmaking can be the catalyst to fundamentally transform business models, carve out new revenue streams and enter new markets, in a way that is not possible through organic growth alone.

A clear case in point is the acquisition of advanced battery technology. In a recent example, the buyer was not only looking to acquire expertise and innovations developed in Formula One racing to decarbonise its own operations, but also market the capabilities to peers and adjacent industries. Moving early to create a leading position in decarbonised logistics could open a huge source of growth and return, whilst reducing energy costs and emissions.

Highlighting the potential for reinvention, an energy company has embarked on a series of acquisitions as part of its shift from oil and gas to hydrogen, liquid natural gas and other green energy supply.

Further, faster

The rationale for transaction-led transformation strategies is compelling. First and foremost is speeding up the time to value. Net zero-focused acquisitions provide immediate access to talent and technology that would take years to develop organically. By the time you’ve tried to do it all yourself, the market would have moved on and the competitive advantage would be lost.

In turn, the asking prices for what are generally start-up and scale-up targets are likely to be a fraction of the buyer’s turnover and valuation. But the acquisitions could be competitively game-changing for early-movers. Sellers may also be keen to find buyers to help them roll-out their technology and commercialise it more widely than they could on their own.

But with the opportunities, come challenges. Some of them are common to the acquisition of all specialist companies in which the primary source of value is proprietary knowledge and a small group of highly sought-after talent. But the sustainability focus of these businesses also creates distinctive issues in areas ranging from potential clashes of purpose and culture, to how to leverage technologies that may not be easily integrated across existing operations.

More fundamentally, navigating the influx of carbon start-ups and tech providers presents challenge for organisations seeking to maximise value from their investment. Acquiring the wrong business, or investing in the wrong tech solution, not only risks short-term return, but also longer-term market share.