Editor’s note: This Sustainalytics report struck us as offering cogent insights, and the authors kindly granted us permission to share this summary. The full report can be found here.

Key Insights

  • The ESG scores of M&A targets and acquirers can serve as a proxy for firm culture, which is an important financial driver in M&A transactions.
  • Within our sample of 231 M&As, ESG compatible deals outperformed ESG incompatible deals by an average of 21% on a five-year cumulative return basis.
  • While other factors can influence the returns of acquiring firms, ESG compatibility may positively contribute to the financial success of M&A deals.

Gauging cultural compatibility with ESG scores 

This report explores how environmental, social and governance (ESG) compatibility may contribute to the financial success of mergers and acquisitions (M&A). Although M&As can present synergistic opportunities, firms involved in such deals are prone to several risks, including potential losses associated with withdrawn or terminated transactions, volatility in company valuations, credit rating downgrades and other financial and legal consequences. A recognized element in the success of completed M&As is the cultural cohesion of the acquiring and target firm. Using ESG scores as a proxy for firm culture, we analyze 231 M&As completed between 2011 and 2016 and test whether deals transacted between companies with comparable ESG scores outperformed those that involved companies with disparate stances on ESG. While other factors can influence the returns of acquiring firms, our analysis suggests that ESG compatibility may positively contribute to the financial success of M&A deals. We also examine the ESG profiles of firms involved in 83 pending M&As and discuss future avenues of research.

Cumulative total returns of acquiring companies in M&A deals  

Source: Sustainalytics, Bloomberg

Opportunities and risks in mergers and acquisitions 

The M&A market is immense. Since 2000, approximately 700,000 M&As have been announced with a total transaction value of USD 50tn.

M&As can present a variety of opportunities to shareholders. Combining companies or assets may result in synergy – the production of shareholder value that is greater than the sum of the value produced by each organization alone.

M&A transactions can also pose material risks, however. According to data from Bloomberg, more than 15,000 M&As with announced values totalling USD 1.3tn were terminated or withdrawn in 2016, resulting in substantial financial losses to prospective buyers and sellers due to incurred expenses, termination fees and share price volatility. Moreover, even when a deal goes through, buyers and sellers still face risks, such as credit rating downgrades, reputational blowback and financial underperformance.

The role of corporate culture

While M&A success and failure can be defined in a variety of ways, analytical metrics typically focus on subsequent changes to shareholder value. In this regard, contributors to M&A success include attaining reliable company valuations, undertaking prudent due diligence measures, and ensuring that the business models and corporate cultures of the target and acquirer are compatible.

We find the cultural cohesion between acquirers and targets particularly interesting in the context of predicting M&A success because a growing body of evidence suggests that firm culture matters more in M&A deals than previously believed, and because of the challenges involved with measuring firm culture relative to other drivers.

ESG as a proxy for culture

A company’s broad positioning on ESG issues, including policies and programmes to manage its environmental and social impacts, human capital development and progressive governance measures, can be used as an insightful proxy for firm culture.  ESG analysis may not capture all aspects of company culture, but in our view it is an increasingly revealing reflection of company norms, especially among mega and large-cap equities where ESG programmes are prominent.

In order to test how corporate ESG compatibility may contribute to the financial success of M&A deals, we analyzed a dataset of 231 M&As completed between 1 June 2011 and 31 May 2016. The 410 firms involved in these deals cover 40 industries and all global markets, with a total announced value of these deals amounts to USD 1.6tn.

We organized the 231 M&As into two groups: ESG compatible deals and ESG incompatible deals. The former category includes transactions in which the difference between the acquirer’s and target’s overall ESG score was equal to or less than five points (in absolute terms) one month prior to the deal completion date. ESG incompatible deals are those in which the difference between the acquirer and target’s ESG score was greater than five points. While the optimal threshold for determining ESG compatibility may vary on a case-by-case basis, and one could use individual E, S, and G indicators to investigate specific ESG compatibility issues, we regard a +/- 5 point differential as a reasonable starting point for this area of research.

The results of this analysis are summarized in the table below (and shown in the chart at top). Acquiring companies involved in M&A deals with an ESG compatible target delivered an average five-year cumulative return of 64%, which compares favourably to the 43% cumulative return for acquiring companies involved in ESG incompatible transactions, and the 53% cumulative return of the sample as a whole.

Cumulative total returns of M&A deal types 

Source: Sustainalytics

Understanding the limitations

While our analysis suggests that ESG compatibility may positively contribute to the financial success of M&A deals, it is important to stress the limitations of our approach. Not the least of these is that the returns of acquiring companies are subject to forces well beyond the impact of M&A transactions, even large M&A transactions.

Another limitation is industry bias. The acquiring companies in the 93 ESG compatible deals are overweighted in banks (8%), real estate (8%) and oil and gas (6%). The composition of the acquiring firms involved in the 138 ESG incompatible deals is quite different, with a concentration in telecommunications (9%), banks (7%) and pharmaceuticals (7%). We also did not account for the effects of firm size: some M&A deals matter more to some acquirers than others.

Despite these limitations, our analysis contributes a new approach to exploring the potential benefits of assessing acquirer-target compatibility in structuring M&A transactions.

Conclusion – Increasing value of ESG analysis

ESG compatibility is only one of many lenses through which an M&A transaction can be viewed. But it is an instructive lens all the same, and possibly one that will become more valuable over time, given the growing importance of cultural cohesion in delivering shareholder value in M&As and the steady uptick of investor and corporate interest in ESG. Our initial analysis on this topic offers a new perspective for investors and management teams to consider when thinking about M&A deals.


Doug Morrow is an innovative, MBA-educated, award-winning research director with 12 years of experience in the responsible investment industry. His work bridges financial analysis and investment strategy with ESG trends and factors. Doug is based in Toronto and leads Sustainalytics’ thematic research team.

Martin Vezér supports the management of internal innovation projects and thematic research publications at Sustainalytics. Prior to joining Sustainalytics, Martin was a postdoctoral scholar at Pennsylvania State University. He earned his Ph.D. in philosophy from the University of Western Ontario and his Master of Science degree from the London School of Economics and Political Science.