Master Thesis of ESG and Company Value

COPENHAGEN BUSINESS SCHOOL
M. Sc. Finance and Strategic Management
Master Thesis
The Role of ESG Performance in M&A Decisions

– Evidence from Acquisition Premia
Author: Supervisor:
Michelle Reichelt (133140) Colin Melvin
Number of Characters: 172,609 (incl. spaces)

Number of Pages: 76 (main) / 114 (total)
May 15th, 2021

Abstract
Assuming the perspective of acquiring firms, this thesis explores the role of ESG performance
in M&A decisions. The core of this thesis is to investigate the relationship between the ESG
performance of target firms and acquisition premia in M&A transactions. In addition, the
underlying rationale for integrating ESG characteristics in M&A decisions and particularly in
the negotiation of purchase prices is examined. In this regard, the areas of value creation through
ESG engagement, the integration of ESG characteristics into due diligence, and the development
of the role of ESG performance in the M&A industry are addressed.
The results of the mixed research approach, which combines quantitative analyses based on a
sample of 600 M&A transactions announced between 2008 and 2019, with a qualitative analysis
based on a guided interview approach, indicate that there is no clear linear relationship between
ESG performance and acquisition premia. In this regard, the results of the qualitative analysis
suggest that the ambiguous relationship between ESG performance and acquisition premia may
be related to the intangible nature and limited quantifiability of ESG characteristics. However,
the ESG performance of target firms seems to be a negotiation factor in acquisition price
negotiations as acquiring firms demand acquisition price discounts for target firms with a
particularly poor ESG performance. In general, the ESG engagement of target firms tends to be
viewed as a value-enhancing instrument by acquiring firms, as it creates value by mitigating ESG
related risks and creating opportunities that result from considering ESG issues in business
decisions. Besides, the obtained results imply that the stakeholders involved in M&A decisions
attribute informative value to ESG characteristics that is relevant for M&A decisions. Although
the integration of ESG characteristics into due diligence is still in its infancy, it appears that ESG
characteristics are increasingly assessed in due diligence. Hence, ESG performance is moving
towards taking an increasingly central role in the M&A industry which can be expected to persist
as regulatory bodies, investors, and the general public promote respective development.
1
Table of Contents
1! Introduction .......................................................................................................................... 7!
1.1! Motivation ...................................................................................................................... 7!
1.2! Terminology ................................................................................................................... 9!
1.3! Research Questions and Objectives ................................................................................10!
1.4! Scientific Method ...........................................................................................................12!
1.5! Thesis Structure .............................................................................................................13!
2! Development of CSR and ESG and their Role in M&A Decisions ....................................14!
2.1! Development and Strategic Turn of CSR ........................................................................14!
2.2! Development and Expansion of ESG..............................................................................17!
2.3! Approximation of ESG Performance through ESG Scores ..............................................18!
2.4! Role of ESG Performance in M&A Decisions ................................................................20!
3! Theoretical Framework.......................................................................................................21!
3.1! Resource-based View .....................................................................................................22!
3.2! Stakeholder Theory ........................................................................................................24!
3.3! Shareholder Theory ........................................................................................................27!
3.4! Managerial Opportunism Theory....................................................................................28!
4! Literature Review ................................................................................................................29!
4.1! ESG Engagement as a Driver of Value Creation .............................................................30!
4.2! Impact of ESG Performance on Acquisition Performance...............................................34!
4.3! Effect of ESG Performance on M&A Decisions .............................................................37!
5! Research Hypotheses ...........................................................................................................39!
6! Research Methodology ........................................................................................................42!
6.1! Quantitative Analyses ....................................................................................................43!
6.1.1! Data and Sample.....................................................................................................43!
6.1.2! Dependent Variable ................................................................................................46!
6.1.3! Independent Variables ............................................................................................47!
6.1.4! Control Variables ...................................................................................................47!
6.1.5! Model Estimation ...................................................................................................50!
6.1.6! Complementary Analysis ........................................................................................52!
6.2! Qualitative Analysis .......................................................................................................53!
7! Empirical Results ................................................................................................................54!
2
7.1! OLS Regression Results .................................................................................................55!
7.2! Complementary Analysis Results ...................................................................................57!
7.3! Interview Results............................................................................................................58!
7.3.1! Role of ESG Performance in M&A Decisions ........................................................59!
7.3.2! Value Creation through ESG Engagement ..............................................................60!
7.3.3! Integration of ESG Characteristics into Due Diligence............................................62!
7.3.4! Development of the Role of ESG Performance in the M&A Industry......................64!
8! Discussion ............................................................................................................................65!
8.1! Mixed Research Results .................................................................................................65!
8.2! Limitations .....................................................................................................................71!
8.3! Implications ...................................................................................................................72!
8.3.1! Implications for Further Research ...........................................................................72!
8.3.2! Practical Implications .............................................................................................74!
9! Conclusion ...........................................................................................................................75!
References ....................................................................................................................................77!
Appendix ......................................................................................................................................88!
3
List of Tables
Table 1: Sample distribution by announcement year ......................................................................45!
Table 2: Sample distribution by industry........................................................................................45!
Table 3: Sample distribution by country.........................................................................................46!
Table 4: Regression Results ...........................................................................................................55!
4
List of Figures
Figure 1: Relative Variable Importance .........................................................................................57!
Figure 2: Partial Dependance Plot ..................................................................................................58!
5
List of Abbreviations
CSR Corporate Social Responsibility

ESG Environmental, social and governance
HR Human resources
HSE Health, safety and environment
IT Information technology
KPI Key performance indicator
M&A Mergers and acquisitions
MSCI Morgan Stanley Capital International
SASB Sustainability Accounting Standard Board
S&P Standard & Poor’s
UN PRI United Nations Principles for Responsible Investment
USD United States Dollar
VIF Variance inflation factor
6
1! Introduction
This section introduces the research questions and objectives by presenting the research motivation,
highlighting the relevance of the subject area and clarifying the terminology used. Further, the
scientific method and the scope and structure of the thesis are outlined.
1.1! Motivation
“Corporate Social Responsibility is a hard-edged business decision. Not because it is a nice thing to
do or because people are forcing us to do it, […] but because it is good for our business.” – Niall
Fitzgerald, Former CEO of Unilever
This quote by Niall Fitzgerald, former CEO of Unilever, is one example of many indicating that
Corporate Social Responsibility (CSR) is increasingly becoming relevant for economic actors.
Further, it implies that CSR can drive firm performance and is a critical component of the strategic
orientation of firms. Accordingly, CSR considerations play a significant role in any managerial
decisions and thus in investment decisions. In recent years, there has been a change towards
assessing value creation based on long-term rather than short-term perspectives, and relationships
have become increasingly relevant in transactions.1 Besides, the socially responsible investment
movement, changing customer demands and society’s overall direction as defined by the United
Nations Sustainable Development Goals have led to a shift in the way investors approach
investments.2 A growing number of investors have acknowledged that firms’ attitude towards CSR
can affect firm performance, risk management and therewith financial returns.3 Hence, key metrics
of a firm’s non-financial performance in addition to financial ones are considered when making
investment decisions.4 In this regard, the European Commission has adopted a proposal for a
Corporate Sustainability Reporting Directive introducing mandatory standards for sustainability
reporting.5 Accordingly, socially responsible investments have experienced increased attention and
rapid growth worldwide, reflecting raised investor awareness of environmental, social and
governance (ESG) issues.6 This resilient growth path is reflected in recent figures. According to the
Global Sustainable Investment Alliance (2018), the total value of all funds managed under an ESG
1
Schoenmaker et al. (2018).
2
Morriesen (2018).
3
Gillan et al. (2020).
4
Del Giudice et al. (2020).
5
Financial Stability, Financial Services and Capital Markets Union (2021).
6
Renneboog et al. (2008).
7
mandate in the five major markets7 increased by 34 percent within two years to 30.7 trillion USD in
2018, with prospects for further growth. This development shapes the investment landscape and its
players. Hence, it can be expected that managers increasingly incorporate ESG characteristics into
their key investment decisions, including the valuation of target firms in mergers and acquisitions
(M&A). M&A activity is on the rise, reshaping industries and affecting numerous economic actors.8
Simultaneously, the complexity of M&A transactions increases due to globalization and elevated
regulatory requirements.9 Hence, M&A decisions have far-reaching effects on numerous
stakeholders and are among the most important firm-level investment decisions.10 The
acknowledgement of the impact of M&A activity on a wide range of stakeholders with varying
interests which, in turn, contribute to firm performance underlines the importance of ESG
characteristics in M&A decisions.11
The following business cases exemplify considerations of ESG characteristics in the context of
investment and M&A decisions, respectively. Firstly, PepsiCo acquired Bare Foods Co. to extend
its product portfolio towards less processed, organic foods and to achieve its vision of ‘Performance
with Purpose’, i.e. selling more nutritious products appealing to consumers’ health.12 Secondly,
MAN Energy Solutions acquired H-TEC Systems to expand its capabilities as a provider of green
hydrogen solutions, which become increasingly important in the global transformation towards a
carbon-neutral economy.13 Finally, Larry Fink, CEO of BlackRock, the world’s largest asset
management firm with 6.96 trillion USD assets under management, clarified in his annual letter to
the executive managers of its portfolio firms that ESG characteristics are firmly anchored in
BlackRock’s investment decisions. 14 Building on these business cases, it can be assumed that ESG
characteristics play a role in investment and M&A decisions, respectively, and that acquiring firms
assign value to the existence of ESG related resources and capabilities of target firms.
7
The five major markets referred to include the United States, Europe, Australia and New Zealand, Canada and Japan.
8
Meglio (2019).
9
Ibid.
10
Ibid.
11
Ibid.
12
Creswell (2018).
13
MAN Energy Solutions (2021).
14
BlackRock (2020).
8
1.2! Terminology
Due to a lack of consistency and confusion in the use of terminology in existing literature, the
terminology for this thesis is explained in the following. Existing literature to some extent
interchangeably refers to the two related concepts, CSR and ESG. CSR has its origins in the impact
of firm activities on society and the environment and can be placed in the context of corporate
behavior.15 ESG, on the other hand, was introduced by the United Nations Principles for Responsible
Investment, a network of investors dedicated to promote the integration of ESG issues into investment
practice and thus relates primarily to the assessment of investment opportunities from the investor
perspective.16 Both concepts and their connection are presented in more detail in section 2. CSR
technically comprises only the first two elements of ESG, i.e. the environmental and the social
behavior of firms while ESG additionally adds the governance dimension.17 In academia and practice,
however, it is commonly understood that CSR encompasses all corporate behaviors that directly or
indirectly impact the stakeholders of a firm.18 In addition, the implementation of social and
environmental activities at the firm-level is usually tied to the governance dimension, and the quality
of a firm’s CSR is increasingly measured based on ESG characteristics.19 Hence, a firm’s
environmental, social and governance conduct can be considered with CSR and the concept of ESG
is increasingly adopted by firms.20 Firms that include ESG issues into their business decisions and
act accordingly in an appropriate way are referred to as socially responsible firms.21 Accordingly, the
adoption of the concept and terminology of ESG by firms indicates that the scope of the concept is
expanding from the investor perspective to the entirety of stakeholders involved in any investment
decisions. For this reason, ESG appears to be the prevailing concept in the context of investment and
therewith M&A decisions and will be used in the further course of this thesis to also relate to corporate
behavior in order to maintain consistency.
Thereby, information on firms’ environmental, social and governance behavior and actions are related
to as ESG characteristics. With respect to the environmental dimension of ESG, information related
to a firm’s environmental practices and efforts to address environmental challenges such as reducing
15
Bowen (1953).
16
Principles for Responsible Investment (2020).
17
Gerard (2019).
18
Lindgreen et al. (2010).
19
Auer et al. (2016); Gillan et al. (2020).
20
Ibid.
21
Clark et al. (2014).
9
pollution and carbon emissions and increasing resource efficiency are evaluated.22 The social
dimension comprises information on a firm’s social interactions with stakeholders such as workforce
requirements, consumer protection and occupational health and safety.23 Finally, for the governance
dimension various inputs influencing corporate decision making such as executive compensation,
board structure and codes of business conduct are considered.24 These ESG characteristics are
assessed to determine the ESG related, non-financial performance of a firm, which is referred to in
the following as ESG performance. Finally, firms’ commitment respectively the process to integrate
ESG issues in decision making and in their organizational structure is referred to as ESG engagement.
1.3! Research Questions and Objectives

Despite the growing attention towards ESG issues, the subject of value creation through ESG
engagement is mainly examined from the perspective of marginal investors. In this respect empirical
research presents inconclusive evidence regarding a significant positive or negative relationship
between ESG performance and investment risk and return.25 Taking the role of acquiring firms in
M&A transactions allows exploring the subject from a different angle. Building on the increasing
relevance attached to ESG performance in M&A decisions, it is considered valuable to develop a
more extensive understanding of its value implications. Existing research investigating the role of
ESG performance in the context of M&A transactions is relatively scarce and focuses largely on the
relationship between the ESG performance of acquiring respectively target firms and the realization
of short- and long-term financial returns. Yet, few individual quantitative and qualitative studies
indicate that ESG performance can impact target firm valuation and therewith acquisition prices.26
More specifically, these studies attribute informative value to the ESG characteristics of target firms
that is relevant in M&A decision making and provide evidence indicating that ESG performance
plays an increasingly central role in M&A transactions.27 In this regard, prior research results show
that ESG characteristics can be considered negotiating factors when determining the acquisition price
of target firms.28 The acquisition price offered for target firms is impacted by numerous factors
comprising firm-, industry- and country-level elements.29 Further, final acquisition prices and
22
Alsayegh et al. (2020).
23
Markopoulos et al. (2020).
24
Sheikh et al. (2018).
25
Friede et al (2015).
26
Qiao et al. (2019); Chen et al. (2015); Maung et al. (2020); Gomes et al. (2018).
27
Ibid.
28
PwC (2013).
29
Zhang (2019).
10
therewith acquisition premia result from complex negotiations between various stakeholders.30 As a
result, decision makers cannot fully attribute acquisition premia to specific factors or origins. In this
thesis, the main focus is on the impact of ESG characteristics as firm-level elements on acquisition
premia in M&A transactions. Hence, the relationship between the ESG performance of target firms
and acquisition premia is investigated. The underlying research question of this thesis is formally
stated in the following:
•! Research question 1: To what extent does the ESG performance of target firms impact
acquisition premia in M&A transactions?
This research question represents the core of this thesis and serves as a guide for this research work.
To investigate the main research question in more depth and explore the underlying rationale for
integrating ESG performance in M&A decisions and particularly in the negotiation of purchase
prices, the following sub-questions are introduced:
•! Research question 2: In which areas does ESG engagement drive value creation for firms?
•! Research question 3: To what extent is the assessment of ESG characteristics integrated
into due diligence?
•! Research question 4: How is the role of ESG performance developing in the M&A industry?
The aim of this thesis is to contribute to the understanding of the role of ESG performance in M&A
decisions. Particularly, this thesis addresses the research gap related to the impact of the ESG
performance of target firms on acquisition premia and outlines implications for further research and
practice on this basis. Thereby, this thesis adds to the literature by complementing quantitative
analyses of the relationship between ESG performance and acquisition premia with a qualitative
analysis exploring the impact of ESG performance on acquisition premia, the underlying drivers of
value creation through ESG engagement, the assessment of ESG characteristics in due diligence
processes, and the development of the role of ESG performance in the M&A industry. The
quantitative analysis takes the form of a multiple regression complemented with the application of
random forests while the qualitative analysis is conducted in the form of guided interviews. By
drawing on different research methodologies, limitations of the individual research methodologies,
30
Ibid.
11
which are further elaborated on in section 8.2. have been counteracted. This mixed research approach
is referred to as methodological triangulation. Methodological triangulation combines multiple
methodological approaches to gather data with the purpose of deepening the understanding of a
subject through a comprehensive multi-perspective view and therewith increasing the ability to draw
conclusions from the findings.31 Accordingly, methodological triangulation enhances the scope,
consistency and profoundness of the methodological approach.32
1.4! Scientific Method

The scientific method chosen for this thesis builds on the ‘research onion’ introduced by Saunders et
al. (2019). Thereby, the researcher bases its research process on several layers that must be
consistently employed. The ‘research onion’ comprises six layers, i.e. research philosophy, research
approach, research strategy, choices of methods, time horizon and data collection, guiding the
decisions made in the development of the research methodology from the outer to the inner layer.33
The first layer is the research philosophy. The research philosophy relates to a set of beliefs and
assumptions regarding the nature of knowledge and thus influences the researcher’s interpretation of
results.34 As the research questions proposed in this thesis examine, on the one hand, quantifiable and
objective knowledge and, on the other hand, attempt to increase the understanding of phenomena
through the interpretations that people attribute to them, both the positivist and interpretive paradigm
represent relevant research philosophies. Accordingly, the quantitative analyses are based on the
positivist paradigm aiming to explain in quantitative respects how variables interrelate, while the
qualitative analysis builds on the interpretive paradigm aiming to create a more detailed
understanding of the subject.35 The research approach, the second layer of the ‘research onion’, is
divided into a deductive and an inductive approach, whereas the former is focused on the development
and testing of hypotheses upon a pre-existing theory and the latter builds on drawing conclusions
from the collected data.36 The chosen research approach has characteristics of both deduction and
induction. The third and fourth layer of the ‘research onion’, the research strategy and choices of
methods, refer to guidelines on how to perform the research.37 As already indicated, this thesis builds
31
Thurmond (2001).
32
Wilson (2014).
33
Saunders et al. (2019).
34
Ibid.
35
Antwi et al. (2015)
36
Saunders et al. (2019).
37
Ibid.
12
on mixed methods combining quantitative with qualitative analyses because the researcher
acknowledges the importance of observing objective realities, while understanding individual
perspectives. The fifth layer of the ‘research onion’ is the time horizon, which can be classified as
cross-sectional or longitudinal.38 With regard to the time horizon, this thesis comprises both cross-
sectional and longitudinal characteristics, as the quantitative analyses provide a snapshot of
observations at a given point in time, whereas the qualitative analysis partially explores the
development of the subject over time. Finally, the core of the ‘research onion’ is the data collection.
Data collection relates to the sources of data and the process of sample selection.39 In terms of data
collection, this thesis is based on primary and secondary data, which is presented in detail in section
6. In general, the researcher is aware of the limitations of the chosen scientific method, which will be
further elaborated on in section 8.2. Correspondingly, the researcher intends to assume an
independent position in the research process to ensure the reliability and validity of the obtained
research results.
1.5! Thesis Structure

This thesis is structured as follows. Section 1 introduces the research questions, while highlighting
the underlying motivation for and relevance of the research work. In addition, the scientific method
is presented and the scope of the thesis is delineated. In section 2, the development of the two related
concepts, CSR and ESG, are explained. Further, ESG characteristics are placed in the context of
M&A decisions and the assessment of ESG performance is discussed. Section 3 gives an overview
of the theoretical background of the subject building on the resource-based view, stakeholder theory,
shareholder theory and managerial opportunism theory. Section 4 provides a literature review
presenting prior research work exploring ESG engagement as a driver of value creation for firms,
the impact of ESG performance on acquisition performance and the effect of ESG performance on
M&A decisions. In section 5, the research hypotheses are developed. Section 6 is dedicated to
explaining the research methodology. In this context, the methodological approach for both, the
quantitative and qualitative analyses are outlined. In section 7, the empirical results are presented.
Section 8 critically discusses the empirical results and presents limitations and implications for
further research and practice. Finally, section 9 concludes by summarizing the obtained results.
38
Ibid.
39
Ibid.
13
2! Development of CSR and ESG and their Role in M&A Decisions
This section addresses the development and strategic turn of CSR and introduces the principle of
shared value. Subsequently, the concept and development of ESG are introduced and connected to
CSR. Further, the difficulties of assessing ESG characteristics and the approximation of ESG
performance through ESG scores are discussed. Finally, the assessment of ESG characteristics in due
diligence as a basis for decision making in M&A transactions is addressed. In this regard, the issue
and the attempt of firms to overcome the information asymmetry inherent in M&A transactions with
due diligence is discussed.
2.1! Development and Strategic Turn of CSR

CSR is a complex, continuously evolving concept comprising an increasingly broad range of issues.40
The concept is rooted in the 1950s, where Corporate Responsibility and Corporate Sustainability have
been first discussed. Corporate Responsibility originates from concerns that firms with their business
activities negatively affect “societal issues such as labor disputes, gender inequality, product recalls,
consumer issues, and fair trade”41. Corporate Sustainability arose from concerns that firms do not
consider environmental issues including, for example, natural resource limitations, threatened
biodiversity and pollution in their business decisions.42 One of the first modern definitions of CSR
was given by Bowen (1953), stating that CSR “refers to the obligation of businessmen to pursue those
policies, to make those decisions, or to follow those lines of action which are desirable in terms of
objectives and values of our society.”43 Since the first definitions of the concept, CSR has gained
increasing momentum and has evolved to a critical corporate strategic orientation. Generally, CSR is
a dynamic concept that is subject to societal changes and depending on the “economic, legal, ethical,
and discretionary expectations that society has of organizations at a given point in time”44.
The European Commission (2011) has defined CSR as “responsibility of enterprises for their impact
on society”45 with the aim to maximize value creation for shareholders, other stakeholders and society
at large. Building on this definition, CSR can be seen as a multi-dimensional concept that addresses
40
Prieto-Carrón et al. (2006).
41
Bansal et al. (2017): p.105.
42
Ibid.
43
Bowen (1953) p. 6.
44
Carroll (1979) p. 500.
45
European Commission (2011) p.6.
14
corporate behavior and actions related to the environmental responsibility and social contribution of
firms.46 Accordingly, a firm’s management is encouraged to pursue long-term sustainable
development and keep a balance between social, environmental and economic benefits. Thereby, the
development of CSR is supposed to be led by firms themselves, while public and regulatory bodies
solely take a supporting role through a mixture of voluntary and mandatory policies.47 The supporting
role of public and regulatory bodies is explained by emphasizing the need for flexibility and
individuality with regard to firm-specific circumstances. 48 Although definitions of CSR are
increasingly being harmonized, there are no universally applied standards.49 Thus, the challenge for
firms is to understand how to integrate CSR considerations into corporate strategy.50
Since the early 2000s, a turn towards CSR can be perceived as an increasing number of investors,
institutions and firms have acknowledged that practically all business decisions contain CSR related
aspects.51 Simultaneously, it is increasingly recognized that CSR related aspects can impact firm
performance significantly.52 Hence, firms’ view on value creation has started to change and the
principle of shared value has emerged.53 The principle of shared value combines the creation of
economic value with the creation of value for society by responding to its needs and challenges.54
Thereby, value is defined as “benefits relative to costs”55 and is generated by “reconceiving products
and markets, redefining productivity in the value chain, and building supportive industry clusters”56.
The underlying idea of this approach is not value redistribution but the expansion of the aggregate
value pool of both economic and societal value.57 According to Porter et al. (2011), the pursuit of
shared value represents a new path to economic success, as societal needs increasingly define markets
and societal harms generate internal costs for firms. Opposed to neoclassical thinking, addressing
societal needs and harms does not necessarily constrain value maximization but can generate value.58
This is the case as increasing innovativeness, improved management approaches and operating
46
Qiao et al. (2019).
47
European Commission (2011).
48
Ibid.
49
Dahlsrud (2006).
50
Ibid.
51
Montiel (2008).
52
Vallentin et al. (2018).
53
Porter et al. (2011).
54
Ibid.
55
Ibid. p. 7.
56
Ibid. p. 7.
57
Ibid.
58
Ibid.
15
procedures and additional opportunities counteract the potentially rising costs for firms.59 Hence,
CSR in profit-oriented firms is assigned both an economic purpose and value creation potential that
goes beyond “doing good for the sake of doing good”60. This indicates that there are extrinsic in
addition to intrinsic motives for socially responsible actions.61 In general, the literature presents two
contrasting views related to the motivations for firms to act socially responsible, the normative and
the business-related view. The normative view relates CSR engagement to the desire of firms to do
good as it is considered the right action morally to take, while the business-related view relates CSR
engagement to the opportunity to achieve economic success.62 Despite the two views being
fundamentally different, the reasons for the CSR engagement of firms could reflect a mixture of
both.63
According to the European Commission (2011), a strategic approach to CSR supports increased
engagement with internal and external stakeholders allowing firms to adjust to changing business
environments. Simultaneously, CSR strategies assist firms to build capabilities to respond to social
pressure which is referred to as social responsiveness.64 Therewith, CSR fosters “risk management,
cost savings, access to capital, customer relationships, human resource management, and innovation
capacity”65 and finally the sustained competitiveness of firms. However, the European Commission
(2011) recognizes the need for increased incentivization for socially responsible conduct, as market
rewards for socially responsible conduct have so far tended to materialize rather in the long term.
Furthermore, the importance of transparency and public recognition for CSR disclosure is
emphasized.66 Although there is no consensus on the role of CSR in corporate strategy, it appears that
CSR is increasingly anchored in the strategic considerations of firms.67
59
Ibid.
60
Vallentin et al. (2018) p.64.
61
Ibid.
62
Castelo Branco et al. (2006).
63
Ibid.
64
Navickas et al. (2015).
65
European Commission (2011) p. 3.
66
Ibid.
67
Ibid.
16
2.2! Development and Expansion of ESG
ESG was introduced by the United Nations Principles for Responsible Investment (UN PRI) in
2006.68 The UN PRI is an international network of institutional investors and investment
professionals, who with the support of the United Nations, have developed the six Principles for
Responsible Investment to integrate ESG issues into investment practice.69 As of March 2020, the
UN PRI counted 3,038 signatories with 103.4 trillion USD assets under management who committed
to applying respective principles in their investment decisions.70 The six Principles for Responsible
Investment build on the belief that “an economically efficient, sustainable global financial system is
a necessity for long-term value creation [and that] such a system will reward long-term, responsible
investment and benefit the environment and society as a whole”71. Accordingly, the UN PRI and their
signatories believe that ESG issues can have an impact on the financial performance of investment
portfolios and that the ESG engagement of firms can result in long-term investment value. The six
Principles for Responsible Investment state the following. Principle 1 says that investors should
extend fundamental investment analysis to systematically incorporate ESG issues in their investment
decisions.72 Principle 2 emphasizes that investors should practice active ownership while anchoring
ESG issues in ownership policies.73 Principle 3 advocates for the ESG disclosure of firms.74 Finally,
in Principles 4 to 6, signatories commit to collectively promote the implementation of the principles
and to report on their related progress.75 Besides, the Principles for Responsible Investment offer a
range of possible actions to implement respective principles and intend to create common
expectations and consistent terminology regarding responsible investments. 76 However, the extent to
which the signatories actually act according to the Principles for Responsible Investment is not clear,
as respective principles are voluntary and aspirational in nature.77
Similar to the concept of shared value, responsible investing combines moral or ethical investment
objectives with the commonly prevailing investment objective of realizing financial returns.78 In this
68
69
Ibid.
70
Ibid.
71
Ibid. p 6.
72
Ibid.
73
Ibid.
74
Ibid.
75
Ibid.
76
Ibid.
77
Kim et al. (2020).
78
17
regard, responsible investing is motivated by materiality, market demand and regulation. Materiality
relates to the acknowledgement in the financial industry that ESG performance can influence
investment risk and return.79 Market demand refers to the fact that capital providers increasingly
demand transparency about the way their money is invested and finally, regulation underlines that
the consideration of ESG issues in investment decisions is part of investor obligations.80
In general, CSR and ESG appear to be related concepts with a slightly different focus. As already
indicated in section 1.2, the difference between CSR and ESG is the inclusion of the governance
dimension in ESG.81 In addition, it becomes clear that CSR is focused on the corporate environment
while ESG has originated from the assessment of investment opportunities from the perspective of
investors. However, building on the argumentation that CSR indirectly incorporates the governance
dimension as it is related to the environmental and social dimensions and that firms’ CSR is widely
evaluated, in academia and practice, on the basis of ESG characteristics, it can be tentatively argued
that ESG appears to be the prevailing concept in the future.82 Accordingly, it seems that the Principles
for Responsible Investing and therewith the relevance of ESG issues are expanding from evaluating
investment opportunities from the perspective of investors to the evaluation of any investment
decisions and thus to M&A decisions.
2.3! Approximation of ESG Performance through ESG Scores

The determination of ESG performance through the assessment of ESG characteristics poses several
challenges. ESG characteristics are, per se, not measurable variables as they are intangible in nature
and not clearly linked to quantifiable values.83 Hence, in academia, ESG performance is often
approximated by the application of ESG scores reported by rating agencies.84 Firm insiders have
compared to external stakeholders superior information about the ESG performance of the firm and
its exposure to ESG related risks resulting in information asymmetry.85 Consequently, external
stakeholders have to invest considerable resources in the assessment of the ESG characteristics of
firms or rely on ESG scores provided by rating agencies acting as intermediaries.86 Examples of these
79
Ibid.
80
Ibid.
81
Gillan et al. (2020).
82
Auer et al. (2016); Gillan et al. (2020).
83
Hawn et al. (2015).
84
Dorfleitner et al. (2015).
85
Lopatta et al. (2016).
86
18
rating agencies include Kinder Lydenberg Domini & Co. by Morgan Stanley Capital International
(MSCI), ASSET4 by Thomson Reuters, Sustainalytics and Bloomberg.87 Rating agencies gather
public non-financial information and additionally collect firm-specific information to compute ESG
scores using different detailed methods.88 In general, ESG scores serve the purpose to quantify ESG
performance, make it comparable across firms and industries and therewith reduce the
aforementioned information asymmetry.89 Third-party involvement, thereby, assures an objective
assessment of related information and increases the credibility of the reported ESG scores.90
However, critics argue that the assessment of ESG performance through ESG scores is neither
accurate, transparent nor reliable for several reasons. Firstly, rating agencies are criticized for their
methods to assess and lack of transparency to evaluate the ESG performance of firms.91 This is due
to the fact that there is no regulation dictating how ESG performance is to be assessed by rating
agencies.92 Rating agencies aggregate a large number of ESG related data points into one single firm
score with little predictive value for future firm conduct.93 Besides, opponents of ESG scores argue
that rating agencies do not focus enough on material issues, i.e. ESG scores are predominantly based
on the business operations of a firm and neglect the industry in which the firm operates.94 This could
result in high ESG scores for firms operating in a, from an ESG perspective, controversial industry
such as tobacco, gambling or nuclear energy.95 Hence, ESG scores may not provide the relevant
information needed for decision making. Secondly, larger firms can dedicate more resources to ESG
reporting and provide more data points to ESG rating agencies, which is questioned to support higher
ESG scores.96 Thirdly, ESG scores are not aligned across rating agencies resulting in questions of
their reliability and credibility, respectively.97 The divergence of ESG ratings originates from
measurement deviations related to the use of varying indicators in the assessment of ESG categories,
weight deviations regarding different perceptions on the relative importance of data points and scope
deviations referring to different basis of assessed ESG categories to build ESG scores.98
87
Ibid.
88
Drempetic et al. (2020).
89
90
Ibid.
91
92
Ibid.
93
Schoenmaker et al. (2018).
94
Ibid.
95
Ibid.
96
Drempetic et al. (2020)
97
Chatterji et al. (2015); Berg et al. (2019).
98
Berg et al. (2019).
19
Consequently, the users of ESG scores are required to understand the underlying data points to decide
whether respective scores measure the intended ESG characteristics and subsequently draw the right
conclusions. Finally, critics argue that the voluntary regulatory environment of ESG reporting
provides incentives for firms to practice greenwashing.99 Given the voluntary disclosure of ESG data,
firms may engage in selective disclosure to create a false impression of their ESG performance and
therewith reduce the reliability of ESG scores.100
2.4! Role of ESG Performance in M&A Decisions

There are numerous factors for firms to consider when engaging in M&A transactions. From the
perspective of acquiring firms, the decision to engage in an M&A transaction, irrespective of their
specific motives such as diversification, growth or market power, is usually linked to the overarching
objective of generating firm value.101 Accordingly, the willingness to pay of acquiring firms depends
on their assumption about the value they can realize from the acquisition. Therefore, their M&A
decisions are based on the assessment of the sources of value creation and the risks associated with
the acquisition of the target firm. As ESG characteristics uncover potential sources of value creation
and as firm-specific risks comprise certain ESG related risks such as corruption, climate, health and
safety risks, ESG characteristics contain relevant informative value for M&A decisions.102 M&A
transactions are highly complex and involve information asymmetry on both sides of the
transaction.103 Target firms have private information about their own fair valuation, while acquiring
firms have private information about the value of potential synergies that they can extract from the
transaction.104 Generally, information asymmetry entails risks and is positively associated with
transaction costs.105 Thus, both acquiring and target firms share the interest to increase transparency
and therewith reduce the information asymmetry inherent in M&A transactions.106
Contrasting to marginal investors who are primarily concerned with systematic risk as they can
diversify their portfolios and liquidate positions at little costs, M&A acquirers are predominantly
99
100
Marquis et al. (2016).
101
Nguyen et al. (2012).
102
Alfonso-Ercan (2020).
103
Zhu et al. (2009).
104
Ibid.
105
Boeh (2011).
106
Ibid.
20
concerned with the specific risk of target firms.107 This results from high investment concentration
and high liquidation costs in connection with the divestiture of the acquired firm.108 For this reason,
however, M&A acquirers are increasingly incentivized to overcome the information asymmetry
between them and potential target firms. Consequently, M&A acquirers conduct extensive due
diligence of target firms to get a holistic firm overview before entering into a share purchase
agreement.109 Due diligence are essential processes in M&A decision making for two main reasons.
Firstly, due diligence serve the purpose of verifying target firm information and providing a basis for
informed investment decisions.110 Secondly, acquiring firms aim to assess the fair market value of
and risks associated with the target firm to conclude their willingness to pay.111 Therewith, the
information asymmetry between the acquiring and the target firm is reduced and potential frictions
arising during the negotiation of the terms of the share purchase agreement are mitigated.112 Further,
thorough due diligence allows the acquiring firm to better understand the potential target firm and
thus enhances their position to fully realize available synergies from the transaction.113 Common areas
of due diligence include, among others, commercial, financial, tax, human resources, IT and legal
due diligence.114 In addition, ESG characteristics are due to their informative value increasingly
assessed in due diligence.115 The assessment of ESG characteristics occurs either directly through an
individual ESG due diligence or indirectly when the evaluation of ESG characteristics is part of
another due diligence stream. However, gathering ESG data poses a challenge in the due diligence
process due to a lack of disclosure and standardization requirements for ESG reporting.
Simultaneously, the limited quality of ESG data is identified by investors as one of their greatest
challenges.116
3! Theoretical Framework
This section provides an overview of theories that are relevant to explain and discuss how ESG
performance can impact the value creation potential of firms and therewith price negotiations in M&A
107
Gomes et al. (2018).
108
Ibid.
109
Rosenbloom et al. (1997).
110
Ibid.
111
Angwin (2001).
112
Wangerin (2019).
113
Howson (2017).
114
Ibid.
115
Alfonso-Ercan (2020).
116
Ibid.
21
transactions. In general, the ESG engagement of firms is associated with both costs and benefits.
Costs related to ESG engagement involve, for example, investments in more stringent quality controls
or health, safety and environmental programs.117 Additionally, the disclosure of information related
to the ESG characteristics of firms involves costs related to, for example, data gathering,
communication and audit.118 The benefits related to the ESG engagement of firms are manifold
relating to, for example, enhanced stakeholder relations, improved access to capital and increased
customer loyalty.119 Accordingly, the ESG engagement of firms can be expected to turn into a
competitive advantage. While the ESG related costs are often continuous or short-term in nature, the
associated benefits rather materialize in the long term.120 The theories presented in this context feature
two opposing views. On the one hand, the resource-based view and stakeholder theory argue that
ESG engagement can drive value creation. On the other hand, shareholder theory and managerial
opportunism theory claim that ESG engagement has a detrimental effect on firm value. These views
result in contradictory conclusions regarding the impact of ESG engagement on firm value and
therewith lead to conflicting implications for dealing with the subject of ESG engagement in M&A
decisions. In the following, the mentioned theories will be presented in more detail.
3.1! Resource-based View

The resource-based view concentrates on the internal environment of the firm and addresses the origin
of sustained competitive advantage.121 According to the resource-based view, superior organizational
performance results from the accumulation of valuable, rare, inimitable and non-substitutable
resources.122 According to Barney (1991), resources include “assets, capabilities, organizational
processes, firm attributes, information, knowledge, etc. controlled by a firm [...] that improve its
efficiency and effectiveness”123. Resources can be of tangible and intangible nature. Tangible
resources comprise financial and physical assets while intangible assets include intellectual property,
organizational and reputational assets.124 Tangible assets are easier to imitate or substitute, but
intangible assets are difficult and costly to develop as they “tend to be historically contextualized,
117
118
Ibid.
119
Ibid.
120
Ibid.
121
Barney (1986).
122
Barney (1986); Lin et al. (2014); Peteraf, (1993).
123
Barney (1991) p. 101.
124
Galbreath (2005).
22
path-dependent, socially complex, and causally ambiguous”125. However, intangible assets establish
a strong resource position barrier as competitive duplication is difficult to achieve. Further, intangible
resources are not traded on factor markets.126 Hence, it is reasonable to expect them to be a source of
competitive advantage rather than tangible resources. Yet, resources are not productive by themselves
but need to be actively deployed by firms to manage activities in order to result in a competitive
advantage.127 As firms have different expectations about the future value of resources, firms vary in
their resource endowment.128 Accordingly, firms also vary in their ability to approach strategic
corporate actions.129 Building on and extending the resource-based view, the dynamic capabilities
view acknowledges that evolving firm environments lead to changing value of resources.130
Correspondingly, competitive advantage can only be sustained by dynamic capabilities, which enable
firms to continuously develop further and protect their unique base of strategic assets. Therewith,
firms gain the ability to proactively respond to changes in their external environment.131 According
to Teece (2007), a firm’s long-term performance in fact, depends on the external environment of the
firm, which implies the importance of the development of dynamic capabilities.
Building on the resource-based view, it can be argued that ESG engagement provides internal and
external benefits for firms. The internal benefits refer to a more efficient deployment of resources and
the further development of resources and capabilities such as corporate culture.132 The external
benefits relate to enhanced stakeholder relationships and improved firm reputation.133 Accordingly,
ESG engagement can be considered both as a strategic asset and as a source for the development of
other strategic assets that have the potential of transforming into sustained competitive advantage.
Additionally, the dynamic capabilities view can explain the increasing importance attributed to ESG
engagement resulting from a shift in societal expectations.134 Customers, employees, financial
institutions, regulatory bodies and other stakeholders of firms devote increasing attention to ESG
engagement and consider the ESG characteristics of firms in their decision making.135 This change
125
Castelo Branco et al. (2006) p. 117.
126
Ibid.
127
Ibid.
128
Dierickx et al. (1989).
129
130
Teece (2007).
131
Teece (2007); Helfat et al. (2007).
132
133
Ibid.
134
Teece (2007).
135
Wang et al. (2016).
23
in the external firm environment creates the need for firms to reconsider their stand on ESG
engagement and integrate ESG considerations into corporate strategies. Simultaneously, ESG
engagement can help firms to become aware of and anticipate changes in their external environment
due to closer relationships with stakeholders which can have a beneficial effect on corporate decision
making.136
By applying this view to M&A decisions, it can be derived that the ESG engagement of target firms
may represent a valuable intangible asset and therewith a source of sustained competitive advantage
to the acquiring firm, i.e. ESG engagement is a rare, valuable, inimitable and non-substitutable
resource.137 ESG engagement related to human resource management such as “fair wages, a clean
and safe working environment, training opportunities, health and education benefits for workers and
their families, provision of childcare facilities, flexible work hours and job sharing”138 helps firms to
attract and retain skilled human resources. Additionally, ESG engagement related to the environment
may decrease costs arising from environmental risks, increase productivity along the firm’s value
chain and create new market opportunities.139 Accordingly, ESG engagement has the ability to impact
firm characteristics and therewith foster the development of other intangible assets such as firm
reputation and corporate culture which both can be expected to lead to improved organizational
performance.140 To the extent that ESG engagement is itself increasingly viewed as a strategic asset
and a source for the development of other strategic assets, this implies that ESG engagement
positively influences the perceived firm value of the target firm from the acquiring firm’s perspective.
However, this requires that the target firm devotes resources to disclosing information about its ESG
engagement and that the acquiring firm is able to accurately assess the ESG performance of the target
firm.141
3.2! Stakeholder Theory

Stakeholder theory builds on the understanding of business as a set of relationships between groups
that have a stake in the activity that constitutes the firm.142 Thus, stakeholder theory represents the
firm environment as an ecosystem of interrelated stakeholder relations.143 Stakeholders provide firms
136
137
Ibid.
138
Ibid. p. 121.
139
Ibid.
140
Aragón-Correa et al. (2003).
141
Omran et al. (2015).
142
Donaldson et al. (1995).
143
Parmar et al. (2010).
24
with resources in exchange for entitlements specified in both explicit contracts such as employment
and supplier contracts and implicit contracts such as promises of product and service quality.144
Within their corporate environment, firms are responsible to all stakeholders that contribute to the
success of the firm or who themselves are impacted by corporate actions.145 Examples of stakeholders
comprise, among others, employees, customers, suppliers, governmental bodies, regulatory
institutions, local communities and shareholders.146 In terms of considering shareholders as an
important stakeholder group, stakeholder theory can be partially aligned with shareholder theory
which will be outlined in section 3.3. From the stakeholder perspective, managers have an obligation
to shape stakeholder relationships to increase the value created for all stakeholders and manage value
distribution to succeed in capitalist systems.147 In the case of conflicts of interest between different
stakeholder groups, managers have to compromise so that the interests of the majority of stakeholders
are met.148 Within the context of the effective management of stakeholder relations, stakeholder
theory also recognizes the responsibility of firms towards society and the environment.149 However,
criticism towards stakeholder theory is based on the argument that the theory does not define how to
aggregate social welfare and how to balance the differing interests of stakeholders.150 Consequently,
it is unclear for managers which stakeholders to prioritize in decision making aiming to maximize
overall value creation and with regard to ESG engagement, which concrete ESG initiatives to pursue
to increase value creation of the firm. Thus, stakeholder theory serves the purpose of understanding
the role of ESG engagement in the context of firm value creation but is less concrete when it comes
to pointing out specific courses of action.
Building on stakeholder theory, it can be argued that ESG engagement increases the quality of
decision making as consequences for all stakeholders involved are considered and thus, a holistic
view of potential issues is possible.151 Additionally, ESG engagement assists firms to create a
favorable connection and more stable relations with stakeholders.152 Enhanced stakeholder relations,
in turn, have a positive impact on firm reputation.153 Firm reputation is determined by stakeholders’
144
Deng et al. (2013).
145
Taghian et al. (2015).
146
Freeman (1984); Parmar et al. (2010).
147
Parmar et al. (2010).
148
Ibid.
149
Russo et al. (2010).
150
Renneboog et al. (2008).
151
Ibid.
152
153
Ibid.
25
evaluation of the signals received by firms about their key characteristics, the media and general
market sentiment.154 In general, improved firm reputation facilitates firms to access external capital
resulting in decreased cost of capital.155 Additionally, it allows firms to negotiate more competitive
contracts with stakeholders.156 Further, improved relations with stakeholders can have the effect of a
strategic insurance protecting firms from the consequences of negative occurrences.157 This is due to
stakeholders’ increased willingness to support firms in the event of respective occurrences.158
By applying this perspective to M&A decisions, it can be argued that firms engaging in ESG related
activities are more likely to value implicit contract commitments.159 This is valued by stakeholders
as implicit contracts as opposed to explicit ones have little legal force.160 Accordingly, stakeholders
are increasingly committed to contributing to the success of firms which can positively impact the
financial performance of firms.161 Besides, a change of corporate control entails the risk that key
stakeholders such as employees, customers or suppliers will move away from the firm, which can
lead to a decrease in the value of the firm.162 Deng et al. (2013) argue that socially responsible firms
are more likely to make M&A decisions that benefit their stakeholders. Hence, a greater level of
stakeholder acceptance can be assumed to result in fewer key stakeholders leaving the firm and
therewith retaining firm value.163 With regard to the reputation of the acquiring firm, the acquisition
of a socially responsible target signals to the market and the general public that the acquiring firm is
aware of the subject and strives to learn from the target firm’s ESG engagement and know-how.164
As a consequence, the market and the general public are more inclined to react positively to the
acquisition of a socially responsible target firm.165 These examples imply that acquiring firms may
view the ESG performance of the target firm as a positive signal in their decision-making process.
However, the importance of ESG disclosure is again to be highlighted as crucial for firms on both
sides of the transaction to benefit from it.166
154
Fombrun et al. (1990).
155
Castelo Branco et al. (2006); Qiao et al. (2019).
156
Ibid.
157
Qiao et al. (2019).
158
Ibid.
159
Deng et al. (2013).
160
Ibid.
161
Ibid.
162
Bekier et al. (2001).
163
Ibid.
164
Qiao et al. (2019).
165
Ibid.
166
Omran et al. (2015).
26
3.3! Shareholder Theory
Opposed to stakeholder theory, shareholder theory introduced in 1970 by Milton Friedman claims
that firms are exclusively devoted to their shareholders. According to Friedman (1970), “the social
responsibility of business is to increase its profits [...] while conforming to the basic rules of society,
both those embodied in law and those embodied in ethical custom”167. Thus, social responsibilities
and corporate actions that increase social welfare are solely to be engaged in with the aim of creating
shareholder value, i.e. the value derived from these engagements should exceed the costs of the used
resources.168 Friedman (1970) justifies this by arguing that it is more efficient to charge lower prices
for products and services and allow stakeholders including shareholders themselves to make
charitable contributions to increase social welfare. Additionally, proponents of shareholder theory
claim that the maximization of shareholder wealth benefits all key stakeholders of the firm.169
Following this neoclassical position, managers acting as agents for shareholders are primarily
responsible to them and have the moral and legal obligation to work towards increasing shareholder
value.170 In accordance with the equity valuation models, shareholder value is measured as a firm’s
market value of equity, which is calculated from the present value of all expected future cash flows
of the firm less the market value of debt capital.171 Critics of shareholder theory argue that managers
solely focusing on shareholder wealth maximization tend to be overly focused on the short term and
neglect long-term value creation.172
In the framework of shareholder theory, ESG initiatives create shareholder value when their
realization increases shareholder wealth or decreases the risk of instability in future cash flows.
However, building on the shareholder expense view, it can be argued that socially responsible actions
in the interest of all firm stakeholders may come at the expense of shareholders. 173 This is the case
when the financial returns from investments in ESG initiatives do not exceed the related costs. When
firms, for example, invest in the implementation of voluntary environmental standards that exceed
those of their competitors and the capital expenditures are not covered by the resulting financial
167
Friedman (1970) p.1.
168
Friedman (1970); Miralles-Quirós et al. (2019).
169
Danielson et al. (2008).
170
Boatright (1994).
171
Malik (2015).
172
Deng et al. (2013).
173
Ibid.
27
returns, a competitive disadvantage may result for respective firms.174 Thereby, the chosen example
of ESG related investment can be replaced by any investments in other ESG related areas, where the
value created is not beneficial to shareholders and the assumption holds. Firms can also suffer a
competitive disadvantage through ESG engagement when the capital and resources invested in ESG
engagement are not available for other strategic activities.175 Consequently, firm value and therewith
shareholder wealth may decrease.
By relating this view to M&A decisions, it can be asserted that acquiring firms perceive the ESG
engagement of target firms as detrimental to firm value. However, even if literature building on
shareholder theory predominantly suggests that ESG engagement decreases firm value and is not in
the interests of shareholders, it has to be noted that shareholders as part of a firm’s stakeholders also
benefit from the value-generating aspects of ESG engagement stated in section 3.2.
3.4! Managerial Opportunism Theory

Managerial opportunism theory is based on Jensen and Meckling’s (1976) agency theory. Agency
theory relates to situations where one party, the principal, appoints another party, the agent, to act on
its behalf.176 Thereby, the principal delegates decision-making authority to the agent resulting in a
principal-agent relationship.177 Principal-agent relationships can give rise to agency problems when
the interests of the principal and the agent diverge and the agent acts opportunistically to the detriment
of the principal’s interests.178 The principal can limit the agent’s activities that deviate from its
interests by establishing both monitoring mechanisms and incentive schemes to restrict opportunistic
managerial behavior.179 The principal-agent relationship relevant for this thesis is the relationship
between firm stakeholders, the principals, and managers, the agents, which can give rise to
opportunistic behavior of the latter.180 According to managerial opportunism theory, managers are
incentivized to focus on short-term profit opportunities and use their superior information about
future prospects for firms to some degree to their private benefit.181 Accordingly, the agency problem
174
Ibid.
175
Preston et al. (1997).
176
Jensen et al. (1976).
177
Ibid.
178
Ibid.
179
Ibid.
180
Ibid.
181
Chalmers et al. (2002).
28
of managers expropriating firm resources to maximize their personal wealth predominates and gives
rise to agency costs.182
Relating managerial opportunism theory to the concept of ESG, it can be argued that managers may
utilize ESG engagement as an instrument to extract private benefits.183 Thus, managers may use ESG
engagement to cover their opportunistic behavior.184 Managers acting opportunistically do not
represent the interests of firm stakeholders and therefore do not prioritize the creation of firm value.185
Thus, in periods of high corporate financial performance, managers tend to underinvest in ESG
engagement to exploit increased cash flows for their private benefits and to the detriment of firm
value.186 On the contrary, in periods of low corporate financial performance, they tend to overinvest
in ESG engagement to justify the poor financial results while improving their own reputation.187 In
the latter case, managers promote ESG engagement to build beneficial relationships with stakeholders
to avoid their scrutiny and develop an entrenchment mechanism against hostile takeovers.188
By applying this perspective to M&A transactions, it can be argued that ESG engagement is primarily
used as an instrument by managers to expropriate firm resources to their private benefit or cover poor
performance. In this regard, high ESG performance induced by opportunistic managerial behavior
can be perceived negatively by acquiring firms, as it may indicate disguised poor financial
performance of target firms and potentially existing agency problems between managers and
stakeholders. Accordingly, acquiring firms may associate the ESG engagement of target firms with
arising agency costs, which may have a value-reducing impact on firm value.
4! Literature Review
This section highlights previous findings of empirical studies on value creation through ESG
engagement and the role of ESG performance in the context of M&A decisions. The literature review
presents three research streams investigating ESG engagement as a driver of value creation for firms,
182
Choi et al. (2013).
183
Cespa et al. (2007).
184
Ibid.
185
Ibid.
186
Sassen et al. (2016).
187
Cai et al. (2011).
188
Choi et al. (2013).
29
the impact of ESG performance on acquisition performance and the effect of ESG performance on
M&A decisions.
4.1! ESG Engagement as a Driver of Value Creation

The first research stream examines how ESG engagement can drive value creation and mitigate value
destruction by reducing firm-level risks. Thereby, value creation is measured in terms of an increase
in firm value.189 Value creation through ESG engagement originates from multiple sources
comprising facilitated access to financing, increased market attractiveness to customers, enhanced
perception of potential employees and improved risk management.190 In terms of facilitated access to
financing, Cheng et al. (2014) provide evidence demonstrating that high ESG performance of firms
increases their ability to access financing in capital markets and therewith reduces capital constraints.
Additionally, Ghoul et al. (2011) find that ESG engagement decreases firms’ cost of equity and that
firms operating in, from an ESG perspective, controversial industry, such as tobacco, gambling and
nuclear energy, are associated with higher equity financing costs. This relation materializes for two
reasons. Firstly, high ESG performance is related to superior stakeholder engagement which mitigates
conflicts of interests between managers and stakeholders and therewith reduces the probability of
opportunistic managerial behavior.191 Further, superior stakeholder engagement is associated with an
increased level of trust and managerial long-term orientation, which in turn positively affect the
profit-generating ability of a firm.192 Secondly, firms with a higher ESG performance demonstrate
increased transparency and accountability as they are more likely to disclose financial and non-
financial information.193 Due to higher levels of transparency, information asymmetries between
firms and external stakeholders are reduced which results in a lower level of perceived risk by the
latter.194 This finding is underlined by Raimo et al. (2021), showing that increased levels of
transparency related to ESG disclosure are negatively associated with the cost of debt financing.
Overall, ESG performance appears to be associated with increased access to and decreased cost of
financing, reducing firms’ cost of capital and thus, enhances financial performance.
189
190
Jo et al. (2012).
191
Surroca et al. (2008).
192
Eccles et al. (2014).
193
Cheng et al. (2014); Ghoul et al. (2011).
194
Ibid.
30
With regard to increased market attractiveness to customers, ESG engagement seems to have an effect
similar to advertising, increasing customer demand and reducing their price sensitivity.195 Liu et al.
(2014) find that customers use the information on the ESG characteristics of firms to evaluate brands.
Thereby, customers link the ESG engagement of firms to customer service and product quality.196
Accordingly, firms can raise customers' brand preference through several ESG initiatives. This
finding is supported by Mittal et al. (2008), showing that ESG engagement supports brand perception
and influences customer decision-making. However, the authors also find that firms are only
rewarded for their ESG engagement when customers assume that firms act from intrinsic motives.197
According to López!Fernández (2020), customers are willing to pay more for products and services
sold by socially responsible firms. This is due to increased customer concerns about the impact of
their purchases.198 Consequently, firms appear to benefit from ESG engagement and corresponding
disclosure impacting the price sensitivity and purchasing decision of customers.
Bhattacharya et al. (2008) argue that the ESG engagement of firms is of increasing importance in
attracting and retaining talents. Employees consider the ESG engagement of firms as representative
of firm values.199 In addition, ESG engagement along with salary, development opportunities and
employee benefits have the potential to fulfill employees’ higher-order psychosocial needs.200 Thus,
ESG engagement is part of firms’ value proposition for employees and affects their work motivation
and willingness to contribute to the success of firms.201 Turban et al. (1997) find that firms with high
ESG performance are perceived as more attractive employers compared to firms with low ESG
performance, as ESG performance is perceived as a signal of enhanced working conditions. Hence,
it appears that ESG performance may provide a competitive advantage in attracting and retaining
talent.202 This finding is supported by Story et al. (2016), stating that perceptions of ESG engagement
are directly related to the organizational attractiveness and reputation of firms, which in turn play a
significant role in attracting and retaining talents. Yet, the value creation potential of the ESG
engagement of firms in the context of attracting and retaining talents is limited by two issues. Firstly,
firms have a poor understanding of the relation between ESG initiatives and their outcomes, i.e. firms
195
Cheng et al. (2014).
196
Liu et al. (2014).
197
Mittal et al. (2008).
198
López!Fernández (2020).
199
Bhattacharya et al. (2008).
200
Ibid.
201
Ibid.
202
Turban et al. (1997).
31
allocate only a few if any resources to comprehend and measure the outcomes of ESG initiatives.203
Secondly, firms often fail to disclose and involve their employees sufficiently in their ESG initiatives.
Hence, firms may not fully leverage their ESG engagement in the search for, management and
retainment of talent.204
In terms of improved risk management, Stulz (2002) shows that risk reduction limiting firms’
exposure to firm-specific risk adds value protecting firms from incurring potential future costs and
therewith increasing the stability of future cash flows. Firm-specific risk is reflected, for example, in
supply chain risk and reputation risk. According to Cruz (2013), global supply chain risk can be
mitigated by ESG engagement. Global supply chain risk includes supply side risk related to supplier
delay or quality issues, demand-side risk related to demand uncertainty or payment delay, and social
risk related to health and safety issues or human rights abuses.205 These risks can be mitigated as
firms with proactive ESG engagement can, through improved stakeholder interactions and
cooperation across the supply chain, better anticipate, identify and mitigate potential disruptions.206
Regarding reputation risk, Cui et al. (2018) state that ESG engagement serves as a means to build and
sustain firm reputation while reducing information asymmetries. They show that firms with high ESG
performance are associated with a more transparent environment for corporate information as ESG
engagement promotes firm transparency regarding financial and non-financial matters in the
following ways.207 Firstly, firms with high ESG performance tend to receive more coverage from
analysts preparing financial reports.208 Hence, ESG engagement facilitates communication with
stakeholders on financial issues.209 Secondly, firms engaging in ESG initiatives are more encouraged
to disclose non-financial information as a means to benefit from their efforts and enhance their
reputation.210 In this regard, Bebbington et al. (2008) find that firms use ESG reporting mainly to
manage the social and environmental aspects of their reputation.
With regard to firm-specific risk in general, Godfrey et al. (2009) show that firms engaging in ESG
initiatives incur smaller losses from negative events such as legal, fiscal or regulatory actions
203
Bhattacharya et al. (2008).
204
Ibid.
205
Cruz (2013).
206
Ibid.
207
Cui et al. (2018).
208
Cui et al. (2018); Hong et al. (2009).
209
Ibid.
210
Fernandez-Feijoo et al. (2014).
32
compared to firms not engaged in respective initiatives. The authors argue that firms’ ESG
engagement provides insurance-like protection since it prevents stakeholders from imposing severe
sanctions in the case of negative impacts resulting from the business activities of firms.211 Hence,
future cash flows are less volatile and firm-specific risk is reduced. This results from the fact that
stakeholders understand ESG engagement as a signal of firms considering the impacts of their
decisions on their various stakeholders.212 Consequently, stakeholders show their appreciation by
assigning firms positive attributions respectively moral capital.213 Thereby, ESG engagement has to
be publicly disclosed and substantial enough to credibly signal the intrinsic motivation of firms to act
socially responsible.214 In line with these results, Sassen et al. (2016), analyzing the impact of ESG
performance on firm-specific risk based on a sample of 8,752 firms, find an inverse relationship
between the ESG scores of firms and firm-specific risk. Hence, the authors conclude that the value
creation potential resulting from investments in ESG initiatives outweighs the respective costs.215
In contrast to the presented literature providing evidence of the value creation potential through ESG
engagement, empirical evidence with concrete examples of areas where ESG engagement is
detrimental to value creation is relatively scarce and ties in with arguments made in the context of
shareholder and managerial opportunism theory.216 In addition, it has to be noted, however, that
varying groups of stakeholders are affected differently by instances of ESG engagement.217 Besides,
ESG engagement includes both corporate philanthropy referring to business-unrelated donations to
society and initiatives that are related to the core business of firms addressing environmental and
social problems.218 Contrasting to corporate philanthropy, ESG initiatives related to the core business
of firms combine positive environmental and social impact with the generation of economic value.219
In this regard, Hillman et al. (2001) and Halme et al. (2009) find that solely ESG engagement that is
related to the core business of firms creates shareholder value. Hence, the value attributed to ESG
engagement depends on how the various stakeholders are affected by respective engagement and how
they subjectively perceive the value it creates.
211
Godfrey et al. (2009).
212
Ibid.
213
Ibid.
214
Ibid.
215
216
Malik (2015).
217
Schaefer et al. (2020).
218
Zhang et al. (2021).
219
Ibid.
33
4.2! Impact of ESG Performance on Acquisition Performance
The second research stream addresses the impact of ESG performance on acquisition performance.
The focus of this research stream lies mainly on the effect of ESG performance on financial returns,
but the impact of ESG performance on the speed of transaction completion and on the post-acquisition
integration of the target firm is also covered.
With regard to financial returns, prior literature shows inconclusive results on the relationship
between ESG performance and financial returns. Deng et al. (2013) argue that the acquisition of a
socially responsible target creates value for the shareholders of acquiring firms both in the short- and
long-term. Investigating a sample of 1,556 M&A transactions completed between 1992 and 2007, the
authors show that acquirers of target firms with high ESG performance realize higher announcement
stock returns, more significant increases in their post-acquisition long-term operating performance
and higher long-term stock returns.220 Their findings support the argumentation presented in the
context of stakeholder theory, suggesting that acquiring firms perceive the ESG engagement of target
firms as value-enhancing, as it improves the acceptance of the transaction by stakeholders.221 In line
with these finding, Zhang et al. (2020) observe positive abnormal returns for acquiring firms with
high ESG performance during their acquisition announcements supporting the argument which
suggests that ESG engagement can provide insurance-like protection for acquiring firms shielding
them from potential negative reactions of stakeholders to transaction announcements. However, when
acquiring firms announce a hostile takeover, high ESG performance of acquiring firms can have the
opposite effect leading to negative announcement returns.222 This can be explained by the fact that
stakeholders perceive the ESG engagement of the acquiring firms in this case as hypocrisy.223
Analyzing a sample of 1,752 US mergers, Zhang et al. (2017) show that the stock market reacts
differently to the responsible versus irresponsible behavior of firms. In this regard, the authors find
that the market especially reacts negatively to the socially irresponsible behavior of firms. Thus,
acquiring firms with high ESG performance can increase shareholder value by limiting stock market
reactions to transactions executed by socially irresponsible firms.224 Conversely, however, it appears
as the stock market does not reward high ESG performance of acquiring firms in the short-term.225
220
Deng et al. (2013).
221
Ibid.
222
223
Ibid.
224
225
Ibid.
34
Krishnamurti et al. (2019) also find that ESG oriented acquiring firms realize significant positive
abnormal returns during the acquisition announcement period. Finally, Aktas et al. (2011) document
that the stock market reacts positively to acquisition announcements of target firms with high ESG
performance. Their findings indicate that the gains of the acquiring firms are derived from the
realization of greater synergies and the ability of target firms to handle ESG related risks.226 In this
regard, the authors also show that the ESG performance of acquiring firms increases with the
acquisition of a target firm with high ESG performance because of learning effects from the ESG
engagement and know-how of the target firms.227 Accordingly, the acquisition of a target firm with
high ESG performance appears to be a value-enhancing decision for the acquiring firm.228
In contrast, Li et al. (2019), investigating a sample of M&A transactions of Chinese firms during the
2010-2017 period, argue that the ESG performance of acquiring firms has no significant effect on
stock market reactions to transactions. In addition, their results indicate that ESG performance has no
long-term effect on firm performance.229 The authors explain their results stating that the market for
corporate control in China represents an exception in the sense that Chinese firms’ ESG engagement
is passive and driven by regulatory authorities rather than serving the long-term benefits of the firm.230
For this reason, it seems that the Chinese market does not react to the ESG performance of firms.231
Tampakoudis et al. (2021) analyze shareholder value implications for acquiring firms in M&A
transactions prior to and during the COVID-19 pandemic. The authors show that acquiring firms with
superior ESG performance, i.e. firms with ESG performance above the 75th percentile realize negative
abnormal returns upon the announcement of transactions during the COVID-19 pandemic, while
firms included in the first three quartiles of the sample incur positive abnormal returns.232 In the
former case, the losses for the acquiring firms’ shareholders range from 0.16 to 0.80 percent implying
significant destruction of shareholder value.233 These findings suggest that in the event of exogenous
shocks, investments in ESG initiatives are perceived as costly by the stock market, as resources
should be allocated to core business activities in times of economic downturn.234 Additionally, the
226
Aktas et al. (2011).
227
Ibid.
228
Ibid.
229
Li et al. (2019).
230
Ibid.
231
Ibid.
232
Tampakoudis et al. (2021).
233
Ibid.
234
Ibid.
35
results indicate that in the event of exogenous shocks, the cost related to ESG engagement outweigh
the potential benefits, supporting the argumentation presented in the context of shareholder theory.
Therefore, the stock market's positive reaction to ESG engagement does not seem to show resilience
to exogenous shocks.235
With respect to the speed of transaction completion, prior research indicates that transactions
involving target firms with high ESG performance are completed in less time and have a lower
probability of failure.236 This increased speed of the transaction process results from greater
acceptance by stakeholders, who are more likely to assume that the transaction will be carried out
under consideration of their interests.237 Moreover, as outlined in section 4.1, ESG engagement
reduces the information asymmetry inherent in M&A transactions, which enables acquiring firms to
assess financial and non-financial information about target firms more accurately and with fewer
resource investments.238 This can, in turn, be expected to positively impact the speed of transaction
completion. Further, Bereskin et al. (2018) provide evidence indicating that similarities in the ESG
engagement of acquiring and target firms lead to less time passing between the announcement and
completion of an acquisition. This results from the fact that ESG engagement is an increasingly
significant part of corporate culture and cultural fit is beneficial in reaching agreement in transaction
negotiations.239
Regarding the impact of ESG performance on the post-acquisition integration of target firms, various
literature identifies the ESG characteristics of firms as relevant factors defining corporate culture,
which is a crucial determinant for the successful integration of target firms.240 Qiao et al. (2019) argue
that the difference in ESG performance between acquiring and target firms impacts post-acquisition
integration, as the difference in ESG performance can be considered as a proxy for dissimilarities in
codes of conduct and firm values. In this regard, Bereskin et al. (2018) find that the shared convictions
regarding ESG engagement among transaction parties is a critical factor contributing to the success
of transactions. Besides, the authors show that, from the perspective of ESG related policies, similar
235
Ibid.
236
Deng et al. (2013).
237
Ibid.
238
Cui et al. (2018); Hong et al. (2009); Fernandez-Feijoo et al. (2014).
239
Bereskin et al. (2018).
240
Ibid.
36
firms experience smoother post-acquisition integration.241 This is due to fewer integration challenges
and facilitated realization of available synergies.242
4.3! Effect of ESG Performance on M&A Decisions

The third research stream focuses on the effect of ESG performance on managerial M&A decisions
such as the selection of acquisition targets, the integration of ESG characteristics into due diligence
or the negotiation of acquisition premia. Regarding the selection of acquisition targets, researchers
find that the ESG performance of potential target firms can be expected to impact the acquiring firm’s
selection decision, as ESG performance is increasingly scrutinized by the stakeholders of a firm.243
Boone et al. (2020) classify firms according to their environmental reputation into green, neutral,
grey and toxic firms and find that toxic firms, which have the lowest environmental performance, are
significantly less likely to participate in the market for corporate control. The authors also document
that changes in the environmental classification of acquiring respectively target firms following the
transaction occur mainly when the transaction parties are placed in different environmental classes.244
This implies that M&A transactions can cause reputational changes in firms. Correspondingly,
acquiring firms consider these potential reputational changes in their decision-making process when
selecting a target firm.245 Additionally, Gomes (2019) empirical findings show that the ESG
performance of a firm is positively correlated with its probability to become an M&A target and that
target firms have, on average, a 2.7 to 4.3 points higher ESG score compared to non-target firms.
Krishnamurti et al. (2019) support this finding by investigating a sample of 776 Australian
transactions. The authors provide evidence indicating that target firms actively engaging in ESG
initiatives are more likely to be acquired by ESG focused acquiring firms.246 Thereby, acquiring firms
select target firms with high ESG performance to mitigate future ESG related risks.247 Further,
Tampakoudis et al. (2019) show that the acquisition of target firms with high ESG performance leads
to increasing ESG performance of the acquiring firm post-acquisition. Reasons for this finding are
given by Brownstein et al. (2020), arguing that the acquiring firm can enhance and complement its
own ESG related practices building on the ESG related capabilities and know-how of the target firm.
241
Ibid.
242
Ibid.
243
Boone et al. (2020); Gomes (2019); Krishnamurti et al. (2019).
244
Boone et al. (2020).
245
Ibid.
246
Krishnamurti et al. (2019).
247
Ibid.
37
In this regard, the authors emphasize the importance for managers to assess the pro forma ESG
performance implications of transactions.248
With regard to the integration of ESG characteristics into due diligence, Zaccone et al. (2020) argue
that existing literature provides no clear understanding of how ESG characteristics are addressed in
due diligence, what evaluation criteria are used to assess ESG performance and what obstacles prevail
when incorporating ESG performance into M&A decisions. Their qualitative research results show
that ESG characteristics in due diligence are mainly assessed by checklists and that only a limited
number of firms employ external resources in the form of industry experts to assess ESG
performance.249 In this context, the authors find that ESG characteristics are predominantly
considered to decrease risks from negative events rather than to provide valuable sources of value
creation, such as to creating market opportunities and driving innovation.250 Utz (2019) argues that
ESG disclosure reduces information asymmetry. Hence, the author identifies increased willingness
of firms to include ESG characteristics into due diligence but claims that a lack of access to and
capability to process ESG data remains a central issue for firms to assess the ESG performance of a
firm.251 Knecht et al. (2007) support this finding by outlining that environmental and social variables
may be classified as intangible in nature, which makes them difficult to measure and analyze. As a
result of little effort by firms to articulate and make tangible the materiality of ESG characteristics to
business operations, ESG characteristics are often disregarded or even misperceived in due
diligence.252 To overcome this challenge, Knecht et al. (2007) present a due diligence process focused
on the assessment of environmental and social variables. Generally, there has been substantial growth
in the development of guidelines to assess ESG performance and to standardize ESG reporting.253
However, compared to financial reporting, ESG reporting is still in its early stages.254
With regard to the negotiation of acquisition prices and thus acquisition premia, there have been very
few studies so far investigating the relationship between ESG performance and acquisition premia,
with controversial results. Chen et al. (2015), analyzing the relationship between the ESG engagement
248
Brownstein et al. (2020).
249
Zaccone et al. (2020).
250
Ibid.
251
Utz (2019).
252
Knecht et al. (2007).
253
Tschopp et al. (2015).
254
Ibid.
38
of target firms and acquisition prices, based on a sample of 134 Israeli M&A transactions, find that
the ESG engagement of a target firm has no significant influence on its valuation. In contrast to these
findings, Choi et al. (2015) show that ESG engagement is viewed as a signal mitigating information
asymmetry between the transaction parties and therewith impacting acquisition premia. In particular,
the authors find that acquiring firms increasingly rely on signals related to the socially irresponsible
behavior of potential target firms resulting in acquisition price discounts.255 Thus, the impact of
socially irresponsible behavior compared to socially responsible behavior of target firms on
acquisition premia seems to be more evident.256 In addition, Maung et al. (2020) provide evidence
from a sample of cross-border acquisitions indicating that target firms with a larger number of
reported negative ESG incidents tend to have lower acquisition premia. According to Maung et al.
(2020), the lower acquisition premia paid for target firms with incidents of socially irresponsible
behavior are due to the exposure of target firms to ESG related reputation risk. The exposure of target
firms to respective reputation risk decreases the materialization of potential synergies for the
acquiring firm.257 Additionally, higher ESG related risks are claimed to go alongside with more
negative earnings surprises and poorer operating performance.258 Qiao et al. (2019), testing a sample
of 252 cross-border acquisitions, also show that acquiring firms are willing to pay an acquisition
premium for socially responsible target firms. Gomes et al. (2018) support these results by finding a
positive correlation between the ESG performance of target firms and acquisition premia. According
to Gomes et al. (2018), this relationship can be explained as the ESG engagement of target firms
mitigates the information asymmetry between the transaction parties and decreases the specific risk
of target firms and therewith creating value for acquiring firms.
5! Research Hypotheses
Based on the theoretical overview and the literature review, this section deals with the development
of research hypotheses which are tested in the further course of this thesis. The presented hypotheses
form the basis for the research methodology and guide the subsequent quantitative and qualitative
analyses.
255
Choi et al. (2015).
256
Ibid.
257
Maung et al. (2020).
258
Ibid.
39
The theoretical overview and the literature review indicate that ESG performance does play a role
and is increasingly accounted for in the context of M&A decisions. Building upon the theories
outlined in section 3, it is shown that there are two opposing views on the value creation potential
assigned to ESG engagement and on the associated relationship between ESG performance and firm
value. However, due to the limited scope of this thesis, the hypotheses development builds on the
prevailing view in academia which is in line with the resource-based view and stakeholder theory.
The resource-based view indicates that ESG engagement is a strategic resource providing internal
and external benefits for firms and simultaneously fostering the development of other strategic
resources which create firm value in the long term.259 Hence, ESG engagement has a positive impact
on the ability of firms to attract and retain highly skilled talents, anticipate and respond to changing
demands of their external environment and to benefit from new market opportunities.260 Therewith,
ESG engagement promotes improved firm performance which can be expected to benefit acquiring
firms after the completion of the transaction. Further, being intangible in nature complicates the
imitation and development of ESG related resources and capabilities by competitors.261 Accordingly,
the ESG engagement of firms can prove to be a source of sustained competitive advantage.262 The
acquisition of target firms, therefore, allows acquiring firms to draw on their ESG related resources
and capabilities without having to develop these themselves which saves costs in the form of the
deployment of resources.
In addition, stakeholder theory suggests that the ESG engagement of firms leads to enhanced
stakeholder relations, which increases the willingness of stakeholders to contribute to firms’ success
and leads to improved firm reputation.263 Further, acquiring firms benefit from enhanced stakeholder
relations as post-transaction integration costs decrease due to greater stakeholder acceptance of the
transaction.264 In general, ESG engagement is a critical factor contributing to the success of
transactions as ESG engagement increases the speed of the transaction process, leads to fewer
integration challenges and facilitates the realization of available synergies.265 Related to the improved
firm reputation, acquiring firms benefit from more competitive contracts with stakeholders and
259
Castelo Branco et al. (2006); Aragón-Correa et al. (2003).
260
Qiao et al. (2019).
261
262
Ibid.
263
Deng et al. (2013).
264
Bekier et al. (2001).
265
Bereskin et al. (2018); Deng et al. (2013).
40
facilitated access to and decreased cost of capital.266 Besides, the acquisition of socially responsible
target firms signals to the market and the general public that the acquiring firms are aware of the
relevance of ESG issues which results in improved market reactions to the announcement of
transactions.267 From the perspective of acquiring firms, the ESG engagement of target firms can thus
be viewed as a value-enhancing instrument. Consequently, acquiring firms can be expected to have a
higher willingness to pay for target firms that are associated with higher ESG performance. In
addition, target firms with high ESG performance can be expected to have an improved negotiating
position in transaction negotiations. Hence, a higher ESG performance of target firms is assumed to
translate into higher acquisition premia. This prediction presenting the main hypothesis investigated
in this thesis is formally stated in the hypothesis below:
Hypothesis 1: A higher ESG performance of target firms is positively associated with acquisition
premia in M&A transactions.
The additional hypotheses are proposed to explore the main hypothesis further and examine the
reasoning for integrating ESG performance in acquisition price negotiations and therewith in
acquisition premia. Building on the presented argumentation underlying Hypothesis 1 stating that the
ESG performance of target firms is positively associated with acquisition premia, it can be assumed
that ESG engagement enhances the organizational performance and drives value creation for firms
and thus, is relevant for acquiring firms in M&A decisions. This assumption is based on the drivers
of value creation through ESG engagement presented in section 4.1, comprising, among others,
facilitated access to and decreased cost of capital, increased market attractiveness to customers,
enhanced perception of employees and improved risk management.268 In the following, this
assumption is formulated as a hypothesis:
Hypothesis 2: ESG engagement of firms drives value creation and is relevant in M&A decisions.
While the two hypotheses developed above are based on the view that ESG engagement has a positive
impact on firm value, the third and final hypothesis explored in this thesis solely builds on the
assumption that ESG performance has a general impact on the perceived value of target firms by
266
267
Qiao et al. (2019).
268
Jo et al. (2012).
41
acquiring firms. ESG performance appears to influence acquisition performance, the negotiation of
acquisition prices and the selection decision of target firms.269 With regard to the latter, particularly
poor ESG performance appears to lead to firms being screened out as potential target firms.270
Besides, the ESG performance of target firms can affect the reputation and the ESG performance of
acquiring firms through transfer effects post-acquisition.271 Accordingly, it can be expected that
acquiring firms are interested in assessing the ESG performance of potential target firms to assess
related costs and benefits. Regardless of whether the ESG engagement of target firms is assessed
positively or negatively by acquiring firms, the discussed increasing strategic orientation of firms
towards integrating ESG issues in business operations in section 2. and in section 4, suggest that ESG
characteristics are considered in business decisions and therewith in M&A decisions. Hence, the third
hypothesis tests for whether ESG characteristics are assigned informative value contributing to the
M&A decision-making process and thus are increasingly integrated into due diligence. Accordingly,
the following hypothesis is proposed:
Hypothesis 3: Firms assign informative value to ESG characteristics in M&A decisions, and thus,
ESG characteristics are increasingly integrated into due diligence.
In the following, the developed hypotheses are tested with a mixed research approach. Thereby, the
quantitative analyses focus on the testing of Hypothesis 1, while the qualitative analysis refers to the
testing of all hypotheses.
6! Research Methodology
The following section presents the research methodology. To provide a comprehensive answer to the
presented research questions and test for the hypotheses put forward, this thesis combines quantitative
with qualitative research approaches. For the quantitative approach, an Ordinary Least Square (OLS)
regression is complemented with the application of random forests, while the qualitative approach
builds on the methodology of guided interviews. The first part of this section focuses on the research
design of the OLS regression and the rationale for the application of random forests, while the second
part outlines the chosen approach for the guided interviews.
269
Boone et al. (2020); Gomes (2019); Krishnamurti et al. (2019).
270
Boone et al. (2020).
271
Ibid.
42
6.1! Quantitative Analyses
In the following, the research design for the OLS regression and the rationale for the application of
random forests is outlined. The methodological design of the OLS regression is inspired by Gomes
et al. (2018), who also examine the impact of ESG performance on acquisition premia based on
multiple regression. This thesis, however, differs from their research approach in the following ways.
Firstly, this thesis covers a different time period of investigation. Secondly, this thesis investigates
the environmental, social and governance dimension of ESG as separate dimensions. Finally, this
thesis supplements the OLS regression with the application of random forests.
6.1.1! Data and Sample
To investigate the relationship between the ESG performance of target firms and acquisition premia
and to test Hypothesis 1, an international sample of M&A transactions announced between 2008 and
2019 was selected. This sample was merged with relevant transaction-related data and information
related to the ESG performance and the financials of the target firms relying mainly on two databases,
Thomson Reuters Refinitiv Eikon and Standard & Poor’s (S&P) Capital IQ. Refinitiv Eikon covers
global public and private M&A activities and serves academia and practice as an extensively used
source of M&A data.272 As part of Refinitiv Eikon, the ASSET4 database comprises a data-driven
evaluation of firms’ ESG performance.273 The ASSET4 database was selected on the basis of
availability and granularity of ESG data to measure ESG performance across the individual ESG
dimensions. The ASSET4 database contains ESG data for approximately 9,000 global publicly-listed
firms with time-series data dating back to the year 2002.274 Further, the ASSET4 database has become
a well-established source of ESG data and is widely used in academic research to measure ESG
performance. In this regard, the ASSET4 database has been referenced in approximately 1,000
academic articles over the last 15 years.275 S&P Capital IQ provides a wide range of financial data
including, for example, profitability ratios, leverage ratios and earnings per share on public and
private firms.276 Hence, S&P Capital IQ is a well-recognized source of financial data in academia.277
272
Thomson Reuters (2018).
273
Ibid.
274
Ibid.
275
Berg et al. (2021).
276
S&P Global Market Intelligence (2021).
277
Ibid.
43
The final sample was derived in several steps. Firstly, a list of completed M&A transactions
announced between January 1st, 2008 and December 31st, 2019 with publicly-listed target firms has
been downloaded from Refinitiv Eikon. Thereby, transactions with financial target or acquiring
firms278 and transactions in which the acquiring firm sought to acquire less than 50 percent of the
target firm’s shares279 were excluded. The resulting sample comprised 6015 transactions. This sample
of transactions was complemented with transaction-related and financial data reported by both
Refinitiv Eikon and S&P Capital IQ. In addition, Bloomberg was used to reviewing information
accuracy. In the next step, this initial sample was merged with the ASSET4 database to obtain the
environmental, social and governance scores280 for the target firms and to identify transactions
without information on the ESG performance of target firms. Accordingly, the sample was reduced
by target firms without corresponding scores. The final sample contains 600 transactions. Table 1
shows the distribution of transactions per year and the yearly average environmental, social and
governance scores as well as the average ESG scores of the target firms. Thereby, the ESG score was
calculated in accordance with Cheng et al. (2014) as an equally weighted average of the
environmental, social and governance scores. The number of transactions per year ranges from nine
in 2008 to 86 in 2018. The average environmental score across the years is with 32.84 the lowest
compared to the average social and governance scores with 42.12 and 43.86, respectively. The
distribution of industries and countries covered by the sample are depicted in Table 2 and Table 3,
respectively. Regarding the industry distribution, Energy and Power, followed by Materials, High
Technology and Industrials are strongly represented in the sample. In terms of countries, the sample
represents 52 countries, of which the United States accounts for the largest share with 45.33 percent
of target firms and 42 percent of acquiring firms, followed by Australia, the United Kingdom, Canada,
Japan and Germany.
278
Due to the regulated nature of the financial industry, M&A activity is restricted, which may impact acquisition premia.
Thus, this thesis follows prior research and excludes financial firms (Cornett et al., 1991; Trichterborn et al., 2015)
279
Following prior research on acquisition premia, this thesis focuses on control bids (Ayers et al., 2003; Dionne et al.,
2015; Gomes et al., 2018).
280
When referring to the individual environmental, social and governance scores of the target firms, ESG is not
abbreviated to emphasize the focus on the individual dimensions.
44
Table 1: Sample distribution by announcement year
Year #Transactions Proportion (%) E score S score G score ESG score

2008 9 1.50 52.53 53.26 55.91 53.90
2009 27 4.50 37.19 38.27 47.72 41.06
2010 35 5.83 37.79 45.21 38.56 40.52
2011 37 6.17 35.20 35.99 39.15 36.78
2012 42 7.00 30.45 36.38 43.12 36.65
2013 26 4.33 35.15 47.91 45.16 42.74
2014 51 8.50 31.25 40.60 38.79 36.88
2015 75 12.50 30.89 40.88 40.34 37.37
2016 66 11.00 33.96 42.18 45.22 40.45
2017 70 11.67 30.21 43.31 42.72 38.75
2018 86 14.33 30.48 45.15 46.81 40.81
2019 76 12.67 33.16 42.61 49.13 41.63
Total 600 100.00 32.84 42.12 43.86 39.61
Notes: This table shows the sample distribution by announcement year. #Transactions denotes the number of
transactions per year. E score, S score, G score and ESG score denote the yearly average scores of targets in the
environmental, social, governance dimensions and the overall ESG scores, respectively.
Table 2: Sample distribution by industry
Industry #Target Proportion (%) #Acquirer Proportion (%)

Consumer Products and Services 23 3.83 29 4.83
Consumer Staples 38 6.33 36 6.00
Energy and Power 107 17.83 106 17.67
Government and Agencies 0 0.00 1 0.17
Healthcare 50 8.33 45 7.50
High Technology 83 13.83 67 11.17
Industrials 67 11.17 78 13.00
Materials 106 17.67 103 17.17
Media and Entertainment 42 7.00 39 6.50
Real Estate 33 5.50 37 6.17
Retail 27 4.50 28 4.67
Telecommunications 24 4.00 31 5.17
Total 600 100.00 600 100.00
Notes: This table shows the sample distribution by industry. #Target and #Acquirer denote the number of
targets and acquirers per industry, respectively.
45
Table 3: Sample distribution by country
Country #Target Proportion (%) #Acquirer Proportion (%)

United States 272 45.33 252 42.00
Australia 73 12.17 39 6.50
United Kingdom 63 10.50 38 6.33
Canada 47 7.83 51 8.50
Japan 15 2.50 32 5.33
Germany 14 2.33 29 4.83
South Africa 13 2.17 12 2.00
France 9 1.50 26 4.33
Switzerland 8 1.33 6 1.00
Brazil 7 1.17 10 1.67
Ireland 6 1.00 4 0.67
India 5 0.83 6 1.00
Israel 5 0.83 3 0.50
Netherlands 5 0.83 8 1.33
Italy 4 0.67 2 0.33
Singapore 4 0.67 6 1.00
Sweden 4 0.67 2 0.33
Other 46 7.67 74 12.33
Total 600 100 600 100
Notes: This table shows the sample distribution by country of origin. #Target and #Acquirer denote
the number of targets and acquirers per country, respectively.
6.1.2! Dependent Variable
The dependent variable in the regression model is the acquisition premium, a continuous numeric
variable. The acquisition premium was used as reported in Refinitiv Eikon. In Refinitiv Eikon, the
acquisition premium is calculated as the percentage difference between the price paid for the target
firm and the target firm’s assessed pre-acquisition market value. For the determination of the pre-
acquisition market value, the market value of the target firm four weeks prior to the transaction
announcement date was used. This approach is in line with the research approaches of Malhotra et al.
(2015) and Hayward et al. (1997). The underlying rationale of using the market value four weeks
prior to the transaction announcement is to prevent the market value from being impacted by potential
rumors of the upcoming acquisition announcement while representing the market value of the target
firm as accurately as possible.281 Generally, the acquisition premium is tied to the expected value
generation potential and the available synergies from the acquisition.282
281
Reuer et al. (2012).
282
Hayward et al. (1997).
46
6.1.3! Independent Variables
The investigated explanatory concept for acquisition premia is the ESG performance of target firms.
In accordance with existing research in this subject area, ESG scores have been applied to measure
the ESG performance of target firms.283 The explanatory variables include the environmental, social
and governance scores. The informative value of respective scores is of central importance for this
thesis. Thus, the ESG scoring methodology of the ASSET4 database is explained in the following.
The ASSET4 database measures the individual environmental, social and governance scores based
on more than 400 firm reported data points across ten areas categorized across the ESG dimensions.284
Thereby, the environmental dimension comprises information related to resource use, emissions and
innovation, while the social dimension includes information on workforce, human rights, community
and product responsibility.285 The governance dimension incorporates information on the firm’s
management, shareholders and CSR strategy.286 The scores range from zero to 100 with zero
indicating the worst and 100 the best performance for a dimension. In year t, firms are assigned with
a z-score that compares their performance to the remainder of firms based on all available information
across the ESG dimensions in year t-1.287 Hence, the resulting score is a relative measure of
performance normalized to a range between zero and 100. For this thesis, the environmental, social
and governance scores of the target firms reported by the ASSET4 database were used as separate
scores. As the scores are only available on an annual basis, the scores from the transaction year were
selected. If these were not available, the respective scores from the previous or the following year of
the transaction were chosen based on the assumption that respective scores do not change
significantly under ordinary circumstances from one year to the next. However, it has been
acknowledged that this assumption is a limitation that is discussed in the context of the overall
accuracy of measuring ESG performance with ESG scores reported by rating agencies in section 8.2.
6.1.4! Control Variables
To ensure that the environmental, social and governance scores do not proxy for further known
variables that may have an impact on acquisition premia, this thesis follows standard practice in this
area of research and includes various control variables in the regression model. The control variables
283
Dorfleitner et al. (2015); Gomes et al. (2018).
284
285
Ibid.
286
Ibid.
287
Ibid.
47
were selected based on existing research in this subject area and can be classified into firm- and
transaction-level variables. At the firm level, Market Value of Equity, Book Value of Equity, Price-
to-Book Ratio, Sales Growth, R&D, CAPEX, Debt-to-Equity Ratio, Debt-to-Total Assets Ratio, Net
Profit Margin and Earnings per Share are included as control variables for the target firm:
•! Market Value of Equity. The market value of equity is a measure of a firm’s equity valuation
and serves as a proxy for firm size. Firm size may positively influence acquisition premia, as
increasing firm size can be associated with greater bargaining power.288 However, larger firms
can also be associated with higher integration costs and less competition among potential
acquiring firms, which should result in lower acquisition premia.289 The market value of
equity is measured as the natural logarithm of the market value of equity at the beginning of
the year. The natural logarithm has been applied to adjust the slightly exponentially skewed
observations.
•! Book Value of Equity. The book value of equity is another measure of a firm’s equity valuation
based on accounting methods. Similarly to the market value of equity, the book value of equity
can be expected to impact acquisition premia. The book value of equity is measured as the
natural logarithm of the book value of equity at the beginning of the year. The natural
logarithm has been applied to adjust the slightly exponentially skewed observations.
•! Price-to-Book Ratio. The price-to-book ratio is a proxy for a firm’s ability to generate future
cash flows. A low price-to-book ratio can both represent the undervaluation of a firm and be
the consequence of negative market sentiment about the firm’s future prospects.290 In the
former case, a negative correlation between the price-to-book ratio and acquisition premia can
be expected, while in the latter case, a positive correlation can be expected.
•! Sales Growth. Sales growth may impact acquisition premia as high sales growth signals
favorable growth prospects of the target firm, which enhances its bargaining position in
acquisition price negotiations.291 Sales growth is measured as the average sales growth over
two years preceding the announcement date.
•! R&D. Research and development is controlled for as investments in research and development
can generate synergistic resources, which may lead to increased acquisition premia.292
288
Qiao et al. (2019).
289
Alexandridis et al. (2011).
290
Dong et al. (2006).
291
Putri et al. (2020); Dionne et al. (2015).
292
Laamanen (2007).
48
Research and development is presented by research and development expenditures scaled by
total assets.
•! CAPEX. Similarly to research and development, capital expenditures can be expected to
influence acquisition premia. Capital expenditures are included as capital expenditures scaled
by total assets.
•! Debt-to-Equity Ratio. The debt-to-equity ratio is controlled for as financial leverage can
impact acquisition premia. In this respect, a high level of debt can represent a financial risk
that leads to reduced acquisition premia.293
•! Debt-to-Total Assets Ratio. As an alternative to the debt-to-equity ratio, a further leverage
ratio is included with the debt-to-total assets ratio. The respective ratio is a proxy for financial
risk which may impact acquisition premia.294
•! Net Profit Margin. The net profit margin is calculated as net income divided by sales and is
included as a proxy for the profitability of a firm. Generally, high profitable target firms can
be expected to command higher acquisition premia.295 However, low target firm profitability
attributable to firm management can be turned around by replacing corresponding
management, which may result in a rapid increase in profitability. This may justify higher
acquisition premia.296
•! Earnings per Share. Earnings per share is computed as net income divided by the number of
shares outstanding and describes the 12-month period prior to the transaction. Earnings per
share is included as an alternative indicator of a firm’s profitability.
At the transaction level, the regression model comprises the control variables Cross Border,
Horizontal and Transaction value:
•! Cross Border. The cross-border variable refers to the countries of origin of the acquiring and
the target firm, respectively. Cross-border transactions are associated with a higher degree of
information asymmetry and uncertainty.297 Hence, it can be assumed that acquiring firms pay
higher acquisition premia in cross-border transactions to mitigate the information asymmetry
between the transaction parties and access private information resources of the target firm,
293
Dionne et al. (2015).
294
Pierret (2015).
295
Haunschild (1994).
296
Ibid.
297
Qiao et al. (2019).
49
which are not accessible to the market.298 The cross-border variable is a dummy variable that
equals one if the transaction parties originate from different countries and zero if they
originate from the same country.
•! Horizontal. The horizontal variable refers to industry relatedness of the transaction parties.
Horizontal transactions are expected to create greater synergies, which may be reflected in
increasing acquisition premia.299 Thus, a dummy variable is included which equals one if the
transaction parties are classified as operating in the same industry and zero if otherwise. The
industry classification is based on the Refinitiv Eikon Business Classification following a
market-based classification scheme.300
•! Transaction value. Larger transactions are expected to attract more public attention which
increases competition among potential acquiring firms.301 Hence, a larger transaction value
may be associated with increased acquisition premia. Transaction value is reported in a
million USD.
A summary of the control variables, their definitions and the expected relationship between the
control variables and the dependent variable is provided in Appendix I. In addition to the selected
control variables presented above, it is controlled for year- and industry-fixed effects. The control for
year- and industry-fixed effects serves the purpose to capture systematic differences across years and
industries such as industry growth, industry concentration and macroeconomic characteristics.302
6.1.5! Model Estimation
To explore how the reported ESG performance of target firms affects acquisition premia, an OLS
regression model was applied with R. R is a software environment suited for statistical calculations
and graphics.303 The regression model, formally stated in Equation 1, is used to test the impact of the
ESG performance of target firms on acquisition premia.
Equation 1:
"#$%&'&(&)*+,-./&%/+ = ++12 + 14 5+'#)-. + + 16 7+'#)-. + 18 9+'#)-. + :;)*(-)<' +
++++++++++++++++++++++++++++++++++++++++++++++++++++=*>%'(-?+.@@.#(' + A.B-+.@@.#(' + C
298
Dionne et al. (2015); Zhu et al. (2009).
299
Chatterjee (1986).
300
301
Laamanen (2007).
302
Madura et al. (2012).
303
The R Foundation (2021).
50
Where the E score, S score and G score relate to the environmental, social and governance scores of
the target firm, respectively. Controls relate to the introduced control variables and Industry effects
and Year effects to the industry-fixed and year-fixed effects. C is related to the residual term.
To ensure that meaningful conclusions can be drawn from the regression results, several attempts
have been made to identify and mitigate potential weaknesses of the regression analysis. Firstly,
outliers were reviewed to mitigate their distorting effect on the coefficient estimates of the regression
analysis. Having identified a few outliers in the sample, these have been accounted for by winsorizing.
Winsorizing is a frequently used procedure in academia to decrease the effect of outliers on the mean
and variance and thus increase the robustness of estimators for location and variability.304 To limit
the effect of outliers, winsorizing reassigns values to a set percentage of variables in both tails of the
distribution by allotting respective values the next lowest value in the upper and the next highest
value in the lower tail of the distribution.305 Hence, outliers were accounted for by winsorizing the
top and bottom one percent of the continuous variables, i.e. all values below the 1st percentile were
set to the 1st percentile and all values above the 99th percentile were set to the 99th percentile.
Secondly, multicollinearity has been assessed. Multicollinearity is defined as a high linear correlation
between the independent variables in a multiple regression model.306 As a result, the effect of these
on the dependent variable is entangled and the precision of the coefficient estimates can be reduced.307
Multicollinearity can be eliminated either by omitting a highly correlated variable from the regression
model or by enlarging the sample.308 Multicollinearity presents a potential issue as this thesis intends
to investigate the impact of the individual environmental, social and governance scores, which are
expected to be interrelated to some extent. To test for multicollinearity, the variance inflation factor
(VIF) and the correlation coefficients were analyzed. An examination of the VIF, presented in
Appendix II, reveals that the degree of multicollinearity is low for all variables as all values are well
below the commonly used threshold of ten.309 To supplement the examination of the VIF, the
correlation coefficients have been analyzed and are presented in Appendix III. A high pairwise
304
Blaine (2018).
305
Ibid.
306
Wooldridge (2012).
307
Ibid.
308
Ibid.
309
O’Brien (2007).
51
correlation indicates that multicollinearity may be an issue.310 The analysis of correlation coefficients
shows that particularly the environmental and the social scores with 0.67 have a relatively high
correlation. In addition, both the environmental and the social as well as the social and governance
scores show a pairwise correlation of 0.39, supporting the assumption that the individual
environmental, social and governance scores are to some extent interrelated. All other correlation
coefficients are, however, well below the commonly applied threshold of 0.7.311 Hence,
multicollinearity does not seem to be an issue in this regression model. Accordingly, none of the
variables was excluded from the regression model.
6.1.6! Complementary Analysis
To investigate possible interactions between variables respectively partly non-linear relationships in

and enhance the understanding of the data sample, random forests have been applied. Random forests
are machine learning algorithms for regression and classification consisting of several uncorrelated
decision trees.312 Random forests have the ability to assess the predictive power of variables and
approximate non-linear statistical relations between variables.313 For this research work, random
forests have been applied in two ways. Firstly, random forests were used to quantify the relative
variable importance and secondly to investigate partly non-linear relationships between the variables
through partial dependence plots.
The application of random forests was based on the same data sample as the OLS regression,
presented in section 6.1.1. For the quantification of relative variable importance, random forests can
measure and compare the relevance of explanatory variables with respect to the dependent variable.314
To quantify the relative variable importance, the improvement of the splitting criterion, i.e. the
decrease of the Gini impurity is accumulated over each decision tree.315 More specifically, at each
node the Gini impurity imposed by a split is minimized by the random forest.316 This allows
calculating the relative importance for each variable by summing up the impurity reduction at each
310
Dormann et al. (2013).
311
Ibid.
312
Genuer et al. (2010).
313
Breiman (2001).
314
Strobl (2008).
315
Xuan et al. (2018).
316
Ibid.
52
node where a split is performed on the variable, normalized by the number of decision trees.317 Since
relative variable importance has no predictive power about the magnitude or direction of the influence
of the explanatory variables on the dependent variable, partial dependence plots were applied. Partial
dependence plots allow showing the influence of input variables on the output variable considering
interactions and transformation of variables.318 Thereby, the input space is partitioned into subspaces
in a way that each subspace has a relatively homogenous response.319 The fitted relations identified
for each subsection are independent of their neighboring subsections. This enables flexible
modeling.320 The application of random forests has been implemented using the add-on package
‘random forests’ of the R programming language for statistical computing.
6.2! Qualitative Analysis

To supplement the quantitative investigation of the research questions and to test the proposed
hypotheses, the methodology of the guided interview was chosen. The purpose of the guided
interviews is to understand the development of the role of ESG performance in the M&A industry
while exploring the relationship between ESG performance and acquisition premia, the underlying
drivers of value creation through ESG engagement and the integration of ESG characteristics into
due diligence. In addition, the guided interviews allow establishing a link with business practice. The
guided interview is a form of a non-standardized, semi-structured interview, which is based on
predefined topics and a list of questions, which is referred to as the interview guide.321 The interview
guide addresses the mentioned subject areas as three individual thematic areas to assure structured
content and comparability. In contrast to a questionnaire, the interview guide serves only as a
framework, which should guarantee a complete survey with regard to the research topic.322 Thus, it
is at all times possible for the interviewer to deviate from the order of questions and their exact
formulations.323 The aim of the guided interviews is to initiate a dialogue between interviewer and
interviewee to collect qualitative data and obtain the interviewee's personal view of the topic.324
Within the scope of guided interviews, the interview situation is designed to be relatively open and
flexible to the input of the interviewees in order to focus on and explore the personal experiences of
317
Ibid.
318
Auret et al. (2012).
319
Ibid.
320
Ibid.
321
Longhurst (2003).
322
Ibid.
323
Ibid.
324
DiCicco-Bloom et al. (2006).
53
the interviewees.325 Due to these characteristics, the methodology of guided interviews supports the
explorative approach of investigating the subject area in practice.
Since the insights and quality of generated information from the guided interviews are predominantly
driven by the interviewees, their selection is of significant importance.326 Accordingly, the selection
of interviewees was based on their experience in M&A transactions, their touchpoints with ESG
issues in M&A processes and research practical aspects such as their accessibility and available time.
To provide a comprehensive assessment of the research subject, it was ensured that various
perspectives are covered. Thus, the selection of interviewees included professionals involved in M&A
transactions as corporate buyers, investment professionals, corporate finance advisors and corporate
M&A lawyers. Although the guided interviews are not comprehensive, they provide useful insights
into how ESG performance is dealt with in M&A decisions in practice and highlight key areas for
further research. In total, ten guided interviews with interviewees from various subject-related
backgrounds have been conducted. The conducted interviews required approximately 30 to 60
minutes, were digitally recorded with the consent of the interviewees and subsequently summarized.
In the summary of the interviews, it was ensured not to change the content of the interviewees'
statements. Due to the limited scope of this thesis, it was decided not to transcribe the interviews but
to summarize the main aspects of each. In addition, the audio files of the conducted interviews can
be provided on request. More detailed information on the interviewees’ professions, the interview
guide and summaries of the individual interviews can be found in Appendix IV, Appendix V and
Appendix VI, respectively. As some interviewees wished to remain undisclosed, all statements are
quoted anonymously in the remainder of this thesis.
7! Empirical Results
This section represents the key results from the quantitative and qualitative analyses. Accordingly,
the results from the OLS regression and the application of random forests as well as the findings from
the guided interviews are highlighted in the following.
325
Ibid.
326
Cameron (2005).
54
7.1! OLS Regression Results
The descriptive statistics for the regression variables are presented in Appendix VII. In line with
previous research, the mean acquisition premium is 29.39 percent with a standard deviation of 31.00
percent.327 The mean environmental, social and governance scores are in our sample with 32.84,
42.12 and 43.86, respectively, slightly lower compared to respective scores in the datasets of previous
research.328 The descriptive statistics for the selected control variables are mainly consistent with
existent literature. Table 4 shows the results from regressing the four-week acquisition premium on
the environmental, social and governance score, respectively. The first column of the table presents
the coefficient estimates, while the second column presents the p-values.
Table 4: Regression Results
327
Maung et al. (2020); Gomes et al. (2018); Qiao et al. (2019).
328
Gomes et al. (2018).
55
The overall significance of the regression model is accounted for with the F-Statistic. The F-statistic
is the result of the test for the overall significance of a regression model. It tests the hypothesis of
whether the independent variables integrated in the regression model have explanatory power for the
dependent variable. The associated p-Value indicates that the regression results are valid at the one
percent significance level. Besides, the regression performance is with an adjusted R squared of 22.35
percent in line with the regression models presented in prior literature.329 Accordingly, the regression
model can be considered robust.
The regression results indicate that the coefficient of the social score is negative and statistically
significant at the five percent significance level suggesting that a target firm’s performance in the
social dimension of ESG performance has a negative relationship with the acquisition premium. More
precisely, an increase of the social score by one point is associated with a 0.2247 decrease in the
acquisition premium. The coefficient of the environmental score is positive and just below the ten
percent significance level. Hence, it can be tentatively suggested that a target firm’s performance in
the environmental dimension of ESG performance is slightly positively associated with the
acquisition premium. However, this relationship is not significant. The coefficient of the governance
score has no explanatory value for the acquisition premium because it is statistically insignificant.
These results contradict prior literature presented in section 4.3. that find a significant positive
association between ESG scores respectively ESG performance and acquisition premia.330 With
regard to the control variables, the regression results indicate that Sales Growth, Book Value of
Equity, Net Profit Margin, Cross Border, Earnings per Share and Market Value of Equity have a
significant impact on the acquisition premium. These results are not detailed due to the limited scope
of this thesis. However, for brief explanations for the relationships between the control variables and
acquisition premia refer to section 6.1.4. Building on the regression results, Hypothesis 1 assuming a
positive relationship between ESG performance and acquisition premia cannot be supported. The
regression results imply that merely the social score has a significant negative impact on the
acquisition premium, whereas the environmental and governance scores have no significant impact
on the acquisition premium.
329
Gomes et al. (2018); Qiao et al. (2019); Maung et al. (2020).
330
Ibid.
56
7.2! Complementary Analysis Results
The results of the complementary analysis based on the application of random forests are intended to
complement the results of the OLS regression. Figure 1 shows the relative importance of the
explanatory variables integrated into the regression model on the dependent variable, the acquisition
premium, ranked by predictive importance. Thereby, the variables are ordered top to bottom from the
most to the least important variables. The x-axis presents the mean decrease of the Gini impurity,
while the y-axis displays the regressor variables. The relative variable importance indicates that the
Book Value of Equity, Sales Growth and the Net Profit Margin have the greatest predictive power
for acquisition premia. Further, the individual environmental, social and governance scores also seem
to have predictive power for acquisition premia, which suggests that the ESG performance of target
firms impacts acquisition premia to some extent. Thereby, the environmental and the social scores
appear to have a greater role in predicting acquisition premia than the governance score. These results
are aligned with the results of the OLS regression presented in section 7.1.
Figure 1: Relative Variable Importance
Book:Value:of:Equity
Sales:Growth
Net:Profit:Margin
Transaction:Value
E:score
S:score
Market:Value:of:Equity
CAPEX
G:score
Earnings:per:Share
Debt8to8Equity:Ratio
Price8to8Book:Ratio
Debt8to8Total:Assets:Ratio
Crossborder
R&D
Horizontal
0 5000 10000 15000 20000 25000 30000 35000 40000 45000
Since relative variable importance plots have no informative value about the magnitude or direction
of the explanatory variables’ impact on the dependent variable, the results of the partial dependence
plot are presented in the following. With respect to the partial dependence plot, acquisition premia
were plotted as a function of the overall ESG scores of the target firms, computed as an equal-
57
weighted average of the individual environmental, social and governance scores. Thus, Figure 2
shows the partial dependence plot depicting the relationship between the overall ESG scores and
acquisition premia. For the interpretation of the partial dependence plot, it must be noted that nearly
90 percent of all observations are in the range between 15 and 90. Hence, the observed peaks result
from few observations in the areas of particularly low ESG scores of less than 15 and particularly
high scores of more than 90, respectively. Hence, these areas are not suitable for interpretation.
However, from the range in between, one can observe that the graph is essentially flat and that the
slight impression of a minimal increase in acquisition premia with increasing ESG scores is
attributable to the fact that the y-axis representing acquisition premia is scaled. Thus, the dispersion
of acquisition premia for different ESG scores is in the range of 29.5 to 30.5 percent. Accordingly, it
appears that ESG scores have no significant impact on acquisition premia, i.e. there is no obvious
linear correlation between ESG scores and acquisition premia that can be identified based on the
partial dependence plot. Hence, Hypothesis 1 can be rejected based on the application of random
forests.
Figure 2: Partial Dependance Plot
7.3! Interview Results

The findings of the guided interviews are structured around four key areas: the role of ESG
performance in M&A decisions, value creation through ESG engagement, the integration of ESG
characteristics into due diligence and the development of ESG performance in the M&A industry. In
the presentation of results, an effort was made to maintain consistency with the terminology
58
previously used. While the entirety of obtained results is discussed in the following, the subsequent
discussion presented in section 8 focuses solely on a few selected connections that are highlighted or
juxtaposed with the findings from the quantitative analysis.
7.3.1! Role of ESG Performance in M&A Decisions
The insights from the interviews indicate that ESG characteristics can have a significant impact on
whether firms are generally considered as potential target firms. In this regard, firms with a
particularly poor ESG performance are screened out as they do not qualify as target firms from the
perspective of acquiring firms.331 Besides, firms in certain industries such as gambling, alcohol, drugs
or weapons are excluded from consideration as potential target firms through negative screening.332
Additionally, Interviewee #10 states that acquiring firms value target firms that are well operated
from an ESG perspective, which translates into a greater likelihood of a transaction being successful.
Interviewee #1 reports that ESG characteristics are increasingly discussed in investment committees
as a way to mitigate risks and increase opportunities related to the competitive situation of a firm, but
that he has not yet seen them have a significant impact on firm valuations. Generally, there was
consensus among the interviewees that, at this point in time, ESG characteristics are not embedded
in valuation models.333 Additionally, the interviewees outline that they have not yet experienced that
firms pay acquisition premia for the reason of superior ESG performance of target firms.334
Simultaneously, it appears from the interview findings that acquiring firms are not willing to pay a
premium for superior ESG performance of target firms, as there cannot be identified and quantified
a clear link between ESG performance and financial returns.335 Consequently, existing acquisition
premia cannot be directly attributed to the ESG performance of target firms due to the difficulty of
measuring and thus relating ESG performance to firm performance.336 In this context, Interviewee #4
notices “there might be the price premium, I just don’t know how to quantify that it actually came
from this performance [ESG performance]”. Conversely, however, the interviewees explain that poor
ESG performance and ESG related risks may lead to acquisition price discounts.337 Hence, it seems
that ESG characteristics do play a role as negotiation factors in acquisition price negotiations. In
331
Interviewee #1; Interviewee #2; Interviewee #5.
332
Interviewee #2;
333
Interviewee #2; Interviewee #3.
334
335
336
Interviewee #4;
337
Interviewee #2; Interviewee #4; Interviewee #7; Interviewee #8.
59
addition, ESG characteristics are addressed in share purchase agreements. In this respect, Interviewee
#10 states that ESG related risks are accounted for in contractual agreements to protect acquiring
firms from potential future costs arising therefrom. Accordingly, it appears that ESG performance is
considered to some extent in M&A decisions and therewith in acquisition price negotiations.
However, there cannot be identified a clear linear relationship between ESG performance and
acquisition premia. Hence, Hypothesis 1 cannot be confirmed on the basis of the guided interviews
either.
7.3.2! Value Creation through ESG Engagement
Based on the interview insights, value creation through ESG engagement is viewed both in terms of
risk mitigation and opportunity creation. In terms of risk mitigation, the interviewees consistently
recognized several ESG related risks that can be mitigated through ESG engagement respectively a
focus on ESG characteristics in decision making. The material ESG related risks highlighted in the
interviews comprise, among others, the following. As a general ESG related risk, Interviewee #1
names the risk of greenwashing. Related to the environmental dimension, the interviewees outline
that firms violating environmental regulations, for example, in terms of storage requirements, waste
disposal or carbon emissions can lead to production shutdowns and financial penalties.338 Concerning
the social dimension, the interviewees highlight risks related to poor safety, inadequate working
conditions and human rights violations.339 These risks are particularly imminent in labor-intensive
firms with a large workforce.340 The risks related to human rights violations are expected to intensify
in the near future as legislation on mandatory human rights due diligence is expected to be enforced
by the European Commission, which in turn will increase the penalties for respective violations.341
Ultimately, all ESG related risks lead to reputational damage, which is itself perceived as a key risk
associated with ESG issues and legal exposure. 342 Accordingly, the interviewees acknowledge that
costs can arise from the presented risks, which can negatively affect a firm’s top and bottom line.343
Hence, it can be tentatively concluded that the consideration of ESG characteristics in decision
making has a positive impact on firm performance and therewith on financial returns.
338
339
340
Interviewee #5.
341
Interviewee #7.
342
343
60
Regarding the value creation potential of ESG engagement, the positive impact of sound ESG
performance on a firm’s capital constraints and its cost of capital is particularly noted by the
interviewees. Equity investors are guided by ESG standards in their capital allocation decisions.344 In
addition, financing terms are increasingly linked to ESG performance. Accordingly, ESG
performance is positively associated with enhanced interest rates and credit terms, which in turn
reduce the cost of capital and therewith have a positive effect on firm performance.345 Besides, ESG
characteristics play an increasing role in stakeholder interactions. The integration of ESG
characteristics into corporate strategy enables firms to enter new markets and unlock new revenue
streams by addressing and providing solutions to changing customer needs as customers increasingly
consider ESG characteristics when making purchasing decisions.346 Hence, value can be created when
the products and services of firms address and resolve ESG related issues. In this context, Interviewee
#2 gives the example of a firm producing wood fiber boards that serve as a renewable source of
insulation. These wood fiber boards are sold at a premium because they are the most environmentally
friendly product of their kind on the market. This example implies that firms offering products and
services which are in line with ESG related objectives may enhance their value proposition to
customers and thus increase customers’ willingness to pay.347 Another example, cited by Interviewee
#3, relates to the energy sector and highlights the revenue potential arising from catering for the
increasing demand for carbon-zero solutions. In relation to employees, the interview findings indicate
that ESG engagement supports talent attraction and retention.348 Additionally, the social dimension
of ESG promoting diverse employee structures can enhance the quality of solutions as it fosters
creativity and enables a multi-perspective view of problems.349
Regarding the measurement of value created through ESG engagement, the interview findings
indicate that firms at the present times do not measure or have difficulties measuring the value created
by ESG engagement. In this context, Interviewee #6 mentions “a lot of value […] is not directly
measurable”350. This results from the fact that ESG characteristics are intangible in nature and, in
very few cases, can be linked to monetary figures.351 However, the interviewees indicate that firms
344
345
346
347
Interviewee #2.
348
349
Interviewee #3.
350
Interviewee #6.
351
61
are increasingly making an effort to gather ESG data and to quantify the value created by ESG
engagement.352 This is partly due to the fact that ESG engagement is started to be considered as a
competitive advantage or “ticket to play”353, respectively. Accordingly, it seems that acquiring firms
view ESG engagement as a value-enhancing instrument which is relevant in M&A decisions, and
thus Hypothesis 2 can be tentatively supported.
7.3.3! Integration of ESG Characteristics into Due Diligence
The interview insights reveal that ESG characteristics in their essence have already been included
and are assessed in an increasingly targeted manner in due diligence, i.e. while in some cases
dedicated ESG due diligence are in place, ESG characteristics are still more commonly not
specifically labeled as such and assessed indirectly as “part of […] the legal, the compliance, the HR,
the HSE354, the tax, the operational […] and many more workstreams”355. The focus of ESG related
due diligence workstreams is primarily on identifying related risks but also on assessing upside
potential.356 The ESG characteristics integrated into due diligence and the approaches to assess
respectively measure ESG characteristics differ across firms. In general, however, it appears that
firms use frameworks developed by officially recognized institutions such as the Sustainability
Accounting Standards Board (SASB), the Chartered Financial Analyst Society Denmark or MSCI as
an orientation guide to identifying ESG key performance indicators (KPIs).357 The interviewees point
out the difficulty of measuring ESG characteristics as “some of these [ESG characteristics] are not
really quantifiable”358. Hence, the assessment of ESG characteristics is often rather qualitative.359 The
limited availability and transparency of ESG data were also mentioned by the interviewees as critical
in this context.360 This issue is particularly relevant in the case of assessing the ESG performance of
private firms, which account for a large share of firms in transactions as private firms are “not subject
to the same rules on disclosures meaning that it is […] much more difficult to get a feeling of […]
how compliant the target actually is”361. However, the interviewees disagree on the relevance firms
352
353
Interviewee #10.
354
HSE stands for health, safety and environmental.
355
Interviewee #10.
356
357
358
Interviewee #4.
359
360
361
Interviewee #10.
62
on the sell-side place on the presentation of ESG characteristics. While Interviewee #10 states that he
is surprised by how little attention sell-side advisors pay to the presentation of the ESG characteristics
of the target firm, Interviewee #5 and Interviewee #8 emphasize the increasing sell-side attention to
this very presentation.
Another difference that becomes apparent from the interviews is related to the resources dedicated to
the assessment of ESG characteristics. Whereas some interviewees explain that they have dedicated
resources to assess ESG characteristics and seek support from external experts to understand a target
firm's ESG performance,362 others have not yet integrated ESG characteristics to this extent into due
diligence.363 To assess key ESG characteristics, information provided in the data room, sustainability
and other non-financial firm reports are primarily used. ESG scores reported by the various rating
agencies are considered at most as additional input or as industry benchmarks in due diligence.364
This is due to the following reasons. Firstly, ESG scores are only available for a limited number of
public firms, which narrows the scope of application as many target firms are private firms.365
Secondly, the methodologies to assess ESG performance differ among rating agencies and are not
aligned with the individual due diligence approaches of acquiring firms regarding the assessment of
ESG performance.366
In general, the dimensions of ESG interrelate and are considered as a triad. Yet, all interviewees agree
that the focus of due diligence and therewith the relative importance of ESG dimensions vary with
the target firm’s business model, jurisdiction and industry.367 The environmental and social
dimensions are, for example, especially relevant for manufacturing firms, while the social and
governance dimensions are in focus when assessing technological firms.368 Hence, the due diligence
process differs depending on the target firm in question. Yet, overall it appears as acquiring firms
assign informative value to ESG characteristics and assess them in due diligence as a basis for
decision making in M&A transactions. Accordingly, Hypothesis 3 can be supported.
362
Interviewee #1; Interviewee #2; Interviewee #5; Interviewee #7; Interviewee #8; Interviewee #9.
363
364
365
366
367
Interviewee #1; Interviewee #2; Interviewee #5; Interviewee #9; Interviewee #10.
368
Interviewee #8.
63
7.3.4! Development of the Role of ESG Performance in the M&A Industry
All interviewees agree that they see an increasing awareness towards ESG issues of firms across
industries. Hence, ESG engagement is becoming increasingly relevant for the M&A industry. Very
few firms go even beyond the mere consideration of ESG issues and aim with their investment
decisions to actively drive change in firms as they “believe into an open dialogue in an engagement
to change things […] [and] do not believe into excluding [firms]”369 from the investment universe.
Interviewee #2 states that private equity funds have started to develop ESG related KPIs with each
portfolio firm and track or report on them regularly. This development is predominantly driven by
three external characteristics and they are the general public, regulatory bodies and investors. Firstly,
firms are adjusting to the changing expectations of the general public as ESG characteristics play an
increasing role in stakeholder interactions and purchasing decisions. 370 Secondly, regulatory bodies
are identified to guide the increasing importance of integrating ESG characteristics into M&A
decisions. Regulatory bodies have the ability with the enforcement of respective legislation to either
incentivize ESG engagement or punish firms that do not operate in line with ESG standards.371 In this
context, Interviewee #2 mentions that the regulatory incentivization is not yet strong enough for them
to recognize best-in-class ESG performance compared to ESG performance aligned to set minimum
standards. Thirdly, the capital allocation decisions of investors are increasingly impacted by ESG
performance. Hence, to attract investor capital firms need to signal that ESG characteristics are
considered in their investment processes.372 The presented driving forces behind the evolution of the
role of ESG performance in the M&A industry primarily appeal to the extrinsic motivation of firms
to integrate ESG considerations into M&A decisions. However, Interviewee #10 points out that he
has observed that socially responsible conduct is also anchored in firm values and therewith in firm
operations. In few cases, performance evaluation and remuneration of investment professionals start
to be tied to ESG related objectives.373 This implies that firms may also have an intrinsic motivation
to act socially responsible. Regardless of the underlying driver, the growing relevance of ESG issues
entails that the subject is being increasingly integrated into investment processes and therewith in
M&A decisions.
369
Interviewee #9.
370
371
372
373
64
8! Discussion
In this section, the results from the quantitative and qualitative analyses are critically discussed and
related to the hypotheses set out in section 5. Since a detailed examination of all empirically obtained
findings would exceed the scope of this thesis, the following interpretation of results focuses on those
findings that are relevant for answering the research questions. Furthermore, the limitations of this
research work are explained and implications for further research and practice are discussed.
8.1! Mixed Research Results

The methodological triangulation allows to validate and test the consistency of the obtained research
results from the quantitative and qualitative analyses. The results from the quantitative analyses
indicate that ESG scores intended to represent the ESG performance of target firms cannot be
positively associated with acquisition premia in M&A transactions. In this regard, the OLS regression
results imply that the environmental and governance scores have no significant impact and the social
score has a significant negative impact on acquisition premia. Thereby, the inverse relationship
between the social score and the acquisition premium may be attributed to the preponderance of costs
associated with maintaining high social standards exceeding the relative benefits.374 Further potential
explanations for this inverse relationship relate to the arguments presented in the context of
shareholder theory and managerial opportunism theory in section 3. Acquiring firms may view ESG
engagement as detrimental to firm value because the resources invested in ESG engagement are not
available for other strategic activities or because ESG engagement indicates opportunistic behavior
of managers expropriating private benefits and concealing poor performance.375 Besides, investments
made in relation to the social dimension of ESG and thereby enhancing the social score of a firm may
be primarily related to corporate philanthropy rather than to corporate strategy increasing the core
business of a firm.376 Accordingly, respective ESG engagement may create social value that is not
reflected in economic value. This may be another reason why the social engagement of target firms
is not considered as value-enhancing from the perspective of acquiring firms and why they demand
an acquisition price discount for it. The inverse relationship between the social score of target firms
and acquisition premia can also be explained when considering that the decision-makers in M&A
transactions are advised and therewith influenced by investment banks, M&A lawyers and financial
374
Deng et al. (2013).
375
Preston et al. (1997); Cespa et al. (2007); Sassen et al. (2016).
376
Hillman et al. (2001); Halme et al. (2009).
65
advisors, who may be incentivized differently than acquiring firms.377 Accordingly, advisors to
acquiring firms may be aware of the value-enhancing impact of ESG engagement but are due to an
increased focus on financial metrics and their own incentivization tied to the short-term perspective
of value creation not willing to recognize the materialization of long-term value created by the ESG
engagement of target firms. This additional explanatory approach relates to the subjective perception
of value attributed to ESG engagement by different stakeholders, which has been addressed in section
4.1. However, due to the limited scope of this thesis, this is not detailed further and only intended to
provide an initial impulse which is suggested to be picked up and explored in further research. The
absence of a significant relationship between the environmental respectively governance scores and
acquisition premia may be attributable to the intangible nature of ESG characteristics. The difficulty
to assess the performance of target firms in the environmental and governance dimensions of ESG
due to insufficient related data and limited quantifiability may result in these not being reflected in
acquisition prices. Therefore, environmental and governance characteristics may be less present in
acquisition price negotiations than social characteristics and, accordingly, have no impact on
acquisition premia.
From the application of random forests, it appears that ESG scores have no significant correlation
with acquisition premia. This finding supports the results of the OLS regression to the extent that
there is no significant linear relationship between the environmental and governance scores and
acquisition premia, but limits the robustness of the observed inverse relationship between the social
scores and acquisition premia. The findings of the qualitative analysis reveal that the ESG
performance of the target firm is not integrated into valuation models.378 Besides, the interviewees
have not yet experienced that superior ESG performance of a target firm when compared to the ESG
performance of similar potential target firms increases the acquiring firm’s willingness to pay for the
target firm and thus increases acquisition premia.379 Conversely, the interviewees point out that
particularly poor ESG performance of target firms may lead to acquisition price discounts.380
Acquisition price discounts can be justified when the presence of ESG related risks is expected to
turn into costs or limit the stability of future cash flows.381 Thus, the results of the qualitative analysis
imply that there is no clear linear relationship between the ESG performance of target firms and
377
Parvinen et al. (2007).
378
379
380
381
Ibid.
66
acquisition premia. The lack of a clearly identifiable linear relationship between the ESG performance
of target firms and acquisition premia was argued to relate to the difficulty of linking the materiality
of ESG engagement to business operations and quantifying the value creation associated with ESG
engagement.382 In this respect, the results of the qualitative analysis indicate that ESG scores may not
be representative of the actual ESG performance of target firms. Hence, ESG scores reported by rating
agencies are considered at most as an additional input or as industry benchmarks in M&A
decisions.383 In addition, ESG scores are criticized for being neither accurate nor transparent and are
solely available for a limited number of publicly-listed firms.384 For this reason, firms in practice have
their own non-standardized approaches to assess the ESG performance of target firms. These insights
raise the question of whether ESG scores are a meaningful measure in the first place to assess the
ESG performance of target firms in the quantitative analyses. Assuming that ESG scores do not
accurately represent the ESG performance of target firms, the conclusions drawn from the results of
the quantitative analyses must be considered with caution. Generally, the results of the qualitative
analysis do not support those of the quantitative analyses, but at the same time, they do not confirm
the positive association between the ESG performance of target firms and acquisition premia
proposed by Hypothesis 1. Hence, on the basis of the obtained results from the quantitative and
qualitative analyses, Hypothesis 1 cannot be supported. The obtained findings contrast prior research
results presented in section 4.3, partially providing evidence for a positive relationship between the
ESG performance of target firms and acquisition premia. Thereby, the different results can possibly
be attributed to the differences in the data basis, the investigation periods and the measurement of
ESG performance in the respective studies.
With regard to Research question 1, addressing to what extent the ESG performance of target firms
impacts acquisition premia in M&A transactions, it can be tentatively argued based on the obtained
research results that the ESG performance of target firms to some extent does play a role in the
negotiation of acquisition prices. This view is supported by the observed acquisition price discounts
demanded for poor ESG performance of target firms. However, it cannot be identified a clear linear
relationship between ESG performance and acquisition premia as ESG performance cannot be
measurably linked to financial performance and thus firm value. The inconclusive results of the
382
Interviewee #4.
383
384
67
quantitative and qualitative analyses do not allow conclusions to be drawn about the specific extent
to which ESG performance impacts acquisition premia.
Regarding Hypothesis 2, stating that ESG engagement drives value creation in an M&A relevant
context, the obtained research results from the qualitative analysis indicate that there are various areas
in which ESG engagement is considered to drive value creation for firms. Generally, value creation
through ESG engagement relates to risk mitigation and opportunity creation. In terms of risk
mitigation, the results suggest that ESG engagement mitigates several risks relevant to M&A
decisions from the perspective of acquiring firms. In M&A decisions, particularly the risk of
greenwashing and risks related to violating environmental, social or human rights regulations are
considered relevant as these risks may lead to reputational damage and legal exposure for acquiring
firms.385 ESG engagement prevents these risks from occurring, and thus from negatively affecting a
firm’s top and bottom line. Correspondingly, the ESG engagement of target firms is perceived
positively by acquiring firms.386 In terms of opportunity creation, it can be concluded from the
findings that ESG engagement creates opportunities, particularly in the following areas. Firstly, ESG
engagement facilitates access to financial resources and reduces the firms’ cost of capital due to
improved stakeholder relations and enhanced firm reputation.387 Secondly, the integration of ESG
issues into corporate strategy provides the opportunity for firms to enter new markets and unlock new
revenue streams by addressing and providing solutions to changing customer needs.388 Finally, ESG
engagement of firms promotes the attraction and retention of talents and fosters a diverse working
environment which has a positive impact on the quality of work.389 Accordingly, it can be tentatively
concluded that the opportunities created through ESG engagement have a positive impact on firm
performance and financial returns and thus, are valued by acquiring firms.
The various examples mentioned by the interviewees suggest that the ESG engagement of firms is
viewed as a value-enhancing instrument, which is relevant in M&A decisions. These findings are in
line with prior research results in this subject area outlined in section 4.1. In addition, the subject that
ESG engagement may be detrimental to firm value did not come up in the guided interviews. Hence,
Hypothesis 2, suggesting that ESG engagement drives value creation for firms and is relevant in M&A
385
386
387
388
389
68
decisions, can be supported. With respect to Research question 2 investigating the areas in which
ESG engagement drives value creation for firms, it can be argued that ESG engagement primarily
creates value by mitigating ESG related risks and creating opportunities for firms that arise from
considering ESG issues in business decisions. However, it has to be noted that this research question
is of explorative nature. Thus, the mentioned areas of value creation are not comprehensive.
Additionally, this research question did not examine the concrete trade-offs between the cost and the
value created by ESG engagement in the addressed areas of value creation. Hence, it is suggested to
explore these trade-offs in future research. However, the identified areas of value creation offer a
useful starting point for firms to evaluate the value creation potential through ESG engagement.
With regard to Hypothesis 3 proposing that ESG characteristics provide informative value in M&A
decisions and are increasingly integrated into due diligence, the results from the qualitative analysis
are in line with the findings from previous literature outlined in section 2.3. Despite a clear
development towards the integration of ESG characteristics into due diligence, the qualitative
analysis shows that the integration of ESG characteristics is still at an early stage level and that there
is no standardized approach to assess ESG performance. Thus, ESG characteristics are, when
considered, usually not labeled as such and are primarily assessed indirectly as a part of related due
diligence streams. In this regard, the interviewees have acknowledged the difficulties in assessing
ESG performance, referring to the intangible nature of ESG characteristics and the criticism of ESG
scores reported by rating agencies.390 However, firms have started to assess the ESG characteristics
of target firms to identify ESG related risks and assess upside potential as a basis for decision
making.391 In addition, the fact that M&A decisions such as the selection decision of target firms and
negotiations of acquisition prices seem to incorporate ESG characteristics implies that relevant
characteristics contribute to decision making. Accordingly, it appears that ESG characteristics are
assigned informative value in M&A decisions and therewith assessed in due diligence. Hence,
Hypothesis 3 can be tentatively confirmed. Regarding Research question 3, concerned with the extent
to which the assessment of ESG characteristics is integrated into due diligence, it can be
correspondingly concluded that the integration of ESG characteristics into due diligence is still in its
infancy. However, it appears that ESG characteristics can be expected to be increasingly assessed in
390
391
69
due diligence in the future as the interviewees have indicated that they notice that firms are looking
more closely at ESG issues in M&A decisions.
Building on the insights from the qualitative analysis and the discussion above, Research question 4
addressing the development of the role of ESG performance in the M&A industry can be tentatively
answered. Although there is inconclusive evidence regarding the impact of ESG performance on firm
value, financial performance and acquisition premia, the increased attention and scrutiny devoted to
ESG performance across industries implies that ESG characteristics as firm-level, non-financial
metrics are attributed informative value relevant for decision making. Hence, ESG performance is
becoming increasingly relevant in investment and M&A decisions. Thereby, the ESG engagement of
target firms appears to play a role in target selection decisions and represents a negotiation factor in
share purchase agreements.392 Accordingly, ESG characteristics are gradually being increasingly
assessed in due diligence to contribute to decision making. However, the assessment of ESG
performance and the evaluation of ESG characteristics represents a major hurdle for acquiring firms
as ESG reporting is still in its early stages.393 For ESG performance to continue to grow in relevance,
this hurdle has to be overcome. Generally, the development of the role of ESG performance in the
M&A industry is predominantly driven by the general public, regulatory bodies and investors. With
the changing expectations of the general public, increasing regulations related to ESG disclosure and
investors growing attention to ESG performance in their capital allocation decisions, firms are
encouraged and simultaneously incentivized to integrate ESG issues in decision making. In this
regard, the outlook for new legislation related to human rights due diligence is one example of many
illustrating this development.394 In addition, it seems that firms also have an intrinsic motivation to
act socially responsible and anchor ESG engagement in firm values. Thus, there are few cases, where
remuneration of investment professionals starts to be tied to ESG related objectives.395 In the future,
it will be interesting to observe the further development of the M&A industry with regard to the
relevance of ESG performance. Although, at this point in time it is not possible to predict with
certainty, where the industry is heading, the obtained findings indicate that ESG performance is
moving towards taking an increasingly central role in the M&A industry as particularly regulatory
bodies, investors, and the general public promote respective development.
392
393
Tschopp et al. (2015).
394
Interviewee #7.
395
70
8.2! Limitations
In addition to the obtained findings, the discussion must also address the limitations of the empirical
research. With respect to the quantitative analyses, limitations are scrutinized related to the intangible
nature of ESG characteristics and thus the measurement of ESG performance through ESG scores, as
well as the inclusion of only publicly-listed firms and the associated sample size. Limitations related
to the measurement of ESG performance through ESG scores originate from a lack of standardization
of ESG reporting and thus a limited ESG data basis resulting in restricted generalizability of results.
With regard to the intangible nature of ESG characteristics, critics of ESG scores question their
informative value as outlined in section 2.4. Hence, ESG scores may not be representative of the ESG
performance of target firms limiting the conclusiveness of the results. Besides, ESG scores differ
depending on the assessment of the different rating agencies. Therewith, the obtained results are
limited to the ESG scores reported by the ASSET4 database. As the ASSET4 database does not
provide gapless ESG scores across the years, in some cases, it had to be assumed that the ESG score
of a firm does not change fundamentally between the year of the transaction and one year prior or
thereafter. This assumption could have influenced the results of the quantitative analyses but was
made to obtain the sample size. Further limitations arise from the inclusion of only publicly-listed
firms and the associated sample size. The ASSET4 database only contains ESG scores for
approximately 9,000 publicly-listed firms.396 Hence, the quantitative analyses only comprise
publicly-listed target firms to investigate the relationship between the ESG performance of target
firms and acquisition premia. This limits the obtained results to publicly-listed, large-scale firms and
may not be applicable for small-scale or private firms. In general, more significant results could have
been obtained if the sample size had been increased and private firms would have been included in
the sample, as private firms account for a great share of target firms in M&A transactions.
The qualitative analysis is subject to limitations mainly originating from the sample size, selection
and self-selection bias. Due to the small sample size of ten conducted interviews, it was possible to
gain more detailed insights into the subject area, but general conclusions can only be drawn to a
limited extent, as the interviewees are not representative of the entirety of stakeholders involved in
M&A decisions. Another limitation arises from selection bias. Selection bias is an experimental
distortion resulting from applying a rule other than random sampling to sample the underlying
396
71
population of interest.397 Due to the nature of semi-structured interviews and the specificity of the
research area, the interviewees have not been randomly selected. Consequently, the selected
interviewees do not fully reflect the distribution of characteristics of the target population. In this
regard, the interviewees’ M&A experiences primarily relate to the Danish and German markets.
Correspondingly, the interview insights cannot be applied without hesitation to the entire M&A
industry. As the interviewees decided voluntarily to participate in the conducted interviews, the
insights generated from the interviews are also subject to self-selection bias. Self-selection bias arises
from individuals selecting themselves into a group resulting in a biased sample.398 The methodology
of interviews requires extensive self-disclosure. Hence, the sample is likely to include individuals
who are more experienced and interested in the research area than the broader sample population.
Accordingly, the obtained results are influenced by the subjective perspective and personal
interpretations of the interviewees. Both selection and self-selection bias lead to issues of
generalizability and representativeness.399
8.3! Implications
Notwithstanding the presented limitations, the results of this thesis provide valuable insights and raise
critical questions relevant for the further research of the subject area and for the formulation of
concrete recommendation of actions. Thus, in the following implications for further research and
practice are presented.
8.3.1! Implications for Further Research
This thesis contributes to the literature on ESG performance in M&A decisions by examining and
improving the understanding of the relationship between ESG performance and acquisition premia.
Thereby, this thesis provides several implications for further research. Firstly, the limited disclosure
of ESG data and the difficulty in assessing the ESG performance of firms represents a severe
challenge for academia and practice and can reduce the conclusiveness of empirical research. Due to
the intangible nature of ESG characteristics and the associated difficulty to quantify ESG
performance, ESG performance was approximated in this thesis through reported ESG scores by the
ASSET4 database. However, as discussed in section 8.1, ESG scores as reported by rating agencies
397
Heckman (2010).
398
Ibid.
399
Costigan et al. (2002).
72
may not be representative of the actual ESG performance of target firms or may not be considered
relevant in the assessment of the ESG performance of target firms by acquiring firms. Hence, further
research can challenge the obtained results by approximating ESG performance in a different way
being more aligned to the assessment of ESG performance in practice. In this regard, the
approximation of the ESG performance of target firms is suggested to build on the SASB materiality
map comprising industry-specific indicators geared towards financial materiality, which are widely
accepted in practice.400 Besides, future research can also include private firms in the quantitative
analyses to extend the results to a holistic view of target firms. The inclusion of private target firms
adds explanatory power to the quantitative analyses as private firms account for the majority of target
firms in M&A transactions. Additionally, the meaningfulness of future research increases when the
ESG performance of both transaction parties is simultaneously considered. In this context, it is
considered interesting to examine whether the size of firms, their public attention and the distance in
ESG performance between the acquiring and the target firm influences the role of ESG performance
in M&A decisions.
Secondly, this thesis considers the individual ESG dimensions, but focuses less on the subcomponents
of each dimension. Accordingly, future research can examine the subcomponents of each dimension
to investigate, whether there are certain subcomponents that are dominant in driving the increasing
relevance of ESG performance in M&A decisions. Thirdly, the results of the qualitative analysis
highlight that acquiring firms have difficulties in attributing acquisition premia to specific origins or
characteristics. In addition, respective firms do not assess how ESG engagement affects value
creation after the completion of the M&A transaction. Hence, further research can extend the findings
of this thesis by quantifying the value created by the ESG engagement of target firms and by exploring
how ESG engagement affects the expected materialization of available synergies. In this regard, the
trade-off between the costs and benefits associated with ESG engagement should be concretely
contrasted with each other. Finally, as already alluded to in section 8.1, it may be interesting to explore
how the different stakeholders involved in M&A decisions perceive ESG performance to impact the
perceived value of target firms. Given that corresponding stakeholders may be differently affected by
ESG initiatives and are diversely incentivized, it can be assumed that the value assigned to ESG
performance depends on the perspective of the varying stakeholders.
400
73
8.3.2! Practical Implications
On the basis of the presented findings, several recommended actions can be derived that are relevant
particularly for the managers of acquiring and target firms, investors and regulatory bodies. The
increasing relevance of ESG performance in M&A decisions results in the need for the stakeholders
involved to actively engage with the subject. Managers of acquiring firms should assess the ESG
performance of target firms as ESG characteristics seem to have informative value relevant in the
setting of M&A decisions. In this regard, managers of acquiring firms are encouraged to integrate the
assessment of the ESG performance of target firms into their due diligence. Thereby, they should be
cautious when drawing on ESG scores reported by rating agencies and should both scrutinize the
rating agencies’ methodological approach to assessing ESG characteristics and validate whether it is
consistent with their understanding of ESG performance. Regardless of whether ESG engagement is
specifically viewed as a value-enhancing instrument, the obtained findings indicate that poor ESG
performance and ESG related risks can result in future cost and decreased stability of cash flows.
Accordingly, the ESG performance of target firms should be considered and discussed in the selection
of target firms and in acquisition price negotiations.
As the mentioned accurate assessment of the ESG performance of target firms also depends on the
ESG disclosure of respective firms, managers of target firms should make ESG data available to
potential acquiring firms to reduce the information asymmetry inherent in M&A transactions. Within
the disclosure of ESG data, the materiality of the ESG engagement of firms to its business operations
and organizational structure should be clarified to increase the tangibility of ESG characteristics.
Thereby, it is suggested to link ESG characteristics to financial metrics such as interest savings,
related revenue streams or any other monetary metric. In addition, managers of target firms should
be aware of the gradually increasing relevance of ESG performance in M&A decisions, as poor ESG
performance may lead to acquisition price discounts or firms not being considered as potential target
firm in the first place. In this regard, managers of target firms are encouraged to deploy ESG
considerations into corporate strategy.
In general, the findings imply that the relevance attributed to ESG performance is, to a large extent,
driven by investors and regulatory bodies. Hence, regulatory bodies should promote the ESG
disclosure of firms to increase transparency in M&A transactions and create a stronger basis for
decision making for the stakeholders involved. Besides, regulatory bodies need to acknowledge their
74
role in driving the development of the role of ESG performance in the M&A industry and increasingly
incentivize the integration of ESG characteristics into M&A decisions as market rewards for socially
responsible conduct have so far tended to materialize rather in the long term. In addition, investors
play a major part in advancing the role of ESG performance in M&A decisions. Simultaneously, they
are also affected by corresponding development. Hence, investors should encourage firms to increase
transparency with regard to ESG disclosure to create a solid basis for investment decisions.
9! Conclusion
This thesis extended previous research on the role of ESG performance in M&A decisions by taking
the perspective of acquiring firms. The core of this thesis was to explore the relationship between the
ESG performance of target firms and acquisition premia. Additionally, the underlying rationale for
integrating ESG characteristics in M&A decisions and therewith in the negotiation of purchase prices
was investigated. Thereby, the areas of value creation through ESG engagement, the integration of
ESG characteristics into due diligence and the development of the role of ESG performance in the
M&A industry have been investigated. To examine the presented research questions, a mixed
research approach was chosen. This approach combines quantitative analyses, based on a sample of
600 M&A transactions announced between 2008 and 2019, with a qualitative analysis based on ten
guided interviews.
The obtained research results reveal the following. Firstly, it appears that there is no clear linear
correlation between the ESG performance of target firms and acquisition premia. This finding may
be related to the intangible nature and limited quantifiability of ESG characteristics. In addition, the
restricted and non-standardized ESG disclosure complicates the assessment of the ESG performance
of target firms. In this respect, the approximation of ESG performance by ESG scores reported by
rating agencies does not seem to be considered sufficiently transparent by acquiring firms to be used
by them as a reliable source for assessing the ESG performance of target firms. Nevertheless, the
ESG performance of target firms appears to be a negotiation factor in acquisition price negotiations.
This is particularly the case when target firms have a particularly poor ESG performance which may
indicate ESG related risks leading to potential future costs and limited stability of cash flows for
acquiring firms. Accordingly, acquiring firms demand acquisition price discounts for target firms
with poor ESG performance. Secondly, the ESG engagement of target firms tends to be viewed as a
value-enhancing instrument by acquiring firms. In this regard, ESG engagement is assumed to create
75
value for acquiring firms by mitigating ESG related risks and creating opportunities that result from
considering ESG issues in business decisions. Thirdly, stakeholders involved in M&A decisions
attribute informative value to ESG characteristics that are relevant for decision making in M&A
transactions. Correspondingly, ESG characteristics are gradually increasing to be integrated into due
diligence to form a basis for decision making. However, the integration of ESG characteristics into
due diligence is still in its infancy. Finally, the development towards ESG performance playing an
increasingly central role in M&A decisions and thus in the M&A industry can be expected to persist
as regulatory bodies, investors and the general public promote increased transparency through ESG
disclosure, anchor ESG standards in regulations and begin to incentivize firms to incorporate ESG
issues in decision making.
76
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Appendix
Appendix I: Description of Control Variables
Control Variable Definition Expected Impact

Market Value of Equity The market value of equity is measured as the natural +/-
logarithm of the market value of equity at the beginning
of the year.
Book Value of Equity The book value of equity is measured as the natural +/-
logarithm of the book value of equity at the beginning of
the year.
Price-to-Book Ratio The price-to-book ratio is calculated as the market value +/-
of equity divided by the book value of equity.
Sales Growth Sales growth is measured as the average sales growth +
over two years preceding the announcement date.
R&D Research and development is presented by research and +
development expenditures scaled by total assets.
CAPEX Capital expenditures are included as capital expenditures +/-
scaled by total assets.
Debt-to-Equity Ratio The debt-to-equity ratio is computed by dividing the -
total liabilities of a firm by its shareholder equity.
Debt-to-Total Assets Ratio The debt-to-total assets ratio is calculated as total -
liabilities divided by total assets.
Net Profit Margin The net profit margin is calculated as net income divided +/-
by sales.
Earnings per Share Earnings per share is calculated as net income divided +/-
by the number of shares outstanding.
Cross Border Cross Border is a dummy variable and refers to the +
countries of origin of the acquiring and the target firm,
respectively.
Horizontal Horizontal is a dummy variable and refers to the +
industry relatedness of the acquiring and target firm. The
industry classification is based on the Refinitiv Eikon
Business Classification following a market-based
classification scheme (Thomson Reuters, 2021).
Transaction value Transaction value measures the consideration paid by +
the acquiring firm for the equity stake in the target firm
plus the net debt of the target firm. The transaction value
is reported in million USD.
Notes: This table presents a summary of the control variables, their definitions and the expected
relationship between the control variables and the dependent variable, the acquistion premium.
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Appendix II: VIF Analysis
VIF 1/VIF
G score 1.363435 0.733442
S score 2.335137 0.42824
E score 2.296708 0.435406
Market Value of Equity 1.768221 0.56554
Price-to-Book Ratio 1.244564 0.803494
Debt-to-Total Assets Ratio 2.683366 0.372666
Sales Growth 1.249828 0.80011
Net Profit Margin 1.238829 0.807214
R&D 2.067466 0.483684
CAPEX 1.539938 0.649377
Earnings per Share 1.308215 0.7644
Debt-to-Equity Ratio 2.289779 0.436723
Transaction Value 1.58319 0.631636
Book Value of Equity 1.659447 0.60261
Notes: This table presents the variance inflation
factors for the independent variables.
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Appendix III: Pearson Correlation Matrix
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
(1) Premium 1
(2) G score -0.01 1
(3) S score -0.11 0.39 1
(4) E score -0.06 0.39 0.67 1
(5) Market Value of Equity 0 0.2 0.25 0.28 1
(6) Price-to-Book Ratio -0.06 0.01 0.03 -0.03 0.27 1
(7) Debt-to-Total Assets Ratio -0.07 0.09 0.01 0.01 0.03 -0.05 1
(8) Sales Growth -0.03 -0.11 -0.09 -0.09 0.04 0.1 0 1
(9) Net Profit Margin -0.22 0.07 0.12 0.11 0.17 0.05 0.1 0.11 1
(10) R&D 0.07 -0.03 0.07 0.01 0.13 0.15 -0.18 0.02 0.07 1
(11) CAPEX 0.08 -0.08 -0.24 -0.15 -0.03 -0.03 0.06 0.17 -0.21 -0.14 1
(12) Earnings per Share -0.03 0.06 0.1 0.01 0.22 0.14 -0.02 0.06 0.13 0.04 -0.07 1
(13) Debt-to-Equity Ratio 0.01 0.08 0.07 0.05 0.01 0.23 0.48 0 0.07 -0.1 -0.02 -0.08 1
(14) Transaction Value 0.05 0.14 0.3 0.28 0.41 0.09 0.1 0.01 0.1 0.1 -0.09 0.27 0.08 1
(15) Book Value of Equity -0.12 0.04 -0.07 0.13 0.09 -0.07 -0.02 -0.05 0.02 -0.01 0.03 -0.06 -0.03 -0.03 1
Notes: This table presents the Pearson Correlation matrix.
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Appendix IV: Interview Guide
Interviewee:
Gender:
Profession:
Firm:
Interview date:
Interview-start time:
Interview-end time:
I.! Introductory aspects

a.! Personal introduction
b.! Interview process
c.! Subject of the research work
d.! Consent declaration for the recording of the conversation
II.! Information about the interviewee

a.! Personal introduction
b.! Expertise in the field of ESG in an M&A context
c.! Internal firm-level ESG considerations and governance of ESG characteristics
d.! Contact points with M&A transactions within the last 3 years
III.! Questions on the integration of ESG characteristics into due diligence

a.! What is your approach towards the due diligence process with respect to ESG
characteristics?
b.! How has this approach changed over the last few years?
c.! For what reasons do you integrate ESG characteristics into due diligence?
d.! What resources have you allocated to ESG due diligence?
e.! How do you measure ESG performance?
i.! Do you apply ESG scores to evaluate ESG performance?
ii.! How do ESG scores factor into the decision-making process?
iii.! How would you evaluate the meaningfulness of ESG scores reported by rating
agencies?
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f.! What ESG characteristics do you consider when evaluating ESG performance?
g.! How do you weigh the different dimensions of ESG, i.e. the environmental, social and
governance dimensions?
IV.! Questions on the role of ESG performance in M&A decisions

a.! To what extent does the ESG performance of the target firm impact your willingness
to execute a transaction?
b.! To what extent does the ESG performance of the target firm impact valuation?
c.! To what extent are you willing to pay a premium for superior ESG performance of the
target firm?
d.! Is the importance of ESG performance sector-related, e.g. due to resource
requirements, regulation and social pressures?
e.! Are you willing to accept different ESG standards depending on the sector that the
target firm operates in?
f.! To what extent are ESG characteristics included in share purchase agreements?
V.! Questions on value creation through ESG engagement

a.! In which areas does ESG engagement create opportunities?
b.! How can ESG engagement decrease risk?
c.! How does ESG engagement drive firm performance?
d.! How do you actively manage ESG characteristics to foster value creation?
e.! How do you measure value created from managing ESG characteristics?
VI.! Final questions

a.! What other questions would you have asked in my place?
b.! Which important aspects should I definitely consider in the context of my research
work?
c.! Should further questions arise, may I contact you again if necessary?
d.! Can you think of any other interesting people to talk to?
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Appendix V: Overview of Interviewees
In total 10 guided interviews have been conducted. The following table shows an overview of the
interviewees and their professional background.
Interviewee Firm Profession

Consultant, Climate Change and
Interviewee #1 Public Accounting
Sustainability Services
Interviewee #2 Private Equity Investment Associate
Interviewee #3 Electrical and Power Engineering Head of Legal M&A
Interviewee #4 Global Logistics Senior M&A Advisor
Interviewee #5 Corporate Finance Advisor M&A Associate
Interviewee #6 Energy M&A and Business Development
Interviewee #7 Corporate M&A Law Corporate M&A Law Associate
Interviewee #8 Pension Fund ESG Director
Interviewee #9 Asset Management ESG Analyst
Interviewee #10 Global Logistics Head of M&A Legal
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Appendix VI: Interview Summaries
As the interviews were primarily conducted to complement the quantitative analyses and given the
limited scope and time for this thesis, they will not be transcribed. Yet, the content and the key
messages of the interviews are summarized in the following. Additionally, an audio file of the
conducted interviews can be provided on request.
Interviewee: Interviewee #1
Gender: Male
Profession: Consultant, Climate Change and Sustainability Services
Firm: Public Accounting Firm
Interview date: 04/08/2021
Interview-start time: 2:00 pm
Interview-end time: 2:30 pm
!
The interviewee introduces himself as a Consultant for Climate Change and Sustainability Services.
He conducts ESG due diligence for both buy- and sell-side transactions and supports private equity
funds to optimize the ESG performance of their portfolio firms during the holding period of the
respective firms. ESG due diligence comprise various categories depending on the business model of
the assessed firms, e.g. logistic firms require particular attention to carbon emissions while toy firms
require increased attention towards the use of plastics. Yet, the general focus is on ESG key metrics
issued for guidance by the Chartered Financial Analyst Society Denmark, Foreningen af
Statsautoriserede Revisorer – Danish Auditors and Nasdaq Copenhagen. The interviewee explains
that ESG due diligence include a materiality analysis to assess the ESG performance of the target
firm and to understand how respective performance relates to the competitive situation of the target
firm. Besides, material risks are identified and the risk of greenwashing is evaluated. Another element
of ESG due diligence is a scenario analysis which assesses the impact of regulatory changes such as
carbon taxes on the firm. The ESG due diligence is conducted based on the available information in
the data room. ESG scores are usually not considered as the transactions that he is involved with are
usually private market transactions, whereas ESG scores are only available for public firms. However,
ESG scores may be used in addition as industry benchmarks. With respect to the weighting of the
dimensions of ESG, the interviewee argues that the focus areas vary with regard to the business model
of the target firm. The environmental dimension has received a lot of attention due to the debates
94
around climate change and circular economy. The social dimension is especially relevant in the
context of employee attraction and retention, while for the governance dimension the focus is on the
capabilities and structure of management teams.
Regarding the integration of ESG characteristics into valuations, the interviewee states that he has
experienced that ESG characteristics are increasingly discussed in investment committees to mitigate
risk and enhance opportunities affecting the competitive situation of a firm. But the interviewee has
not yet experienced that ESG characteristics have a material impact on firm valuation. However, the
interviewee explains that he has noted that private equity firms screen out firms with particularly poor
ESG performance. This is due to regulations and increased pressure from institutional investors.
Institutional investors have themselves ESG targets to fulfill, which affect their capital allocation
decisions. Consequently, private equity firms that market funds need to signal to investors that ESG
characteristics are considered and addressed in the investment process.
Regarding the value creation potential through ESG engagement, the interviewee argues that firms
can generate additional revenues offering sustainable products to customers. Further, firms following
ESG standards are more likely to attract investor capital. With respect to the mitigation of risk, the
interviewee underlines the importance of ESG due diligence to avoid the risk of greenwashing and to
reduce social risks in connection with employee programs or safety.
95
Gender: Male
Profession: Investment Associate
Firm: Private Equity Firm
The interviewee introduces himself as an Associate in the investment team of a mid-cap private equity
fund. He is responsible for identifying portfolio firms, preparing and accompanying transactions and
for advising acquired portfolio firms over the holding period. The interviewee explains that there are
due diligence streams both addressing risk limitation and assessing upside potential, whereas ESG
due diligence primarily relates to the former i.e. ESG engagement is mainly relevant to mitigate risk.
The ESG due diligence are executed in collaboration with a specialized ESG consulting firm. In
general, the subject of ESG due diligence is already relevant since at least the last five years, but what
has changed over time is that the private equity fund has started to actively drive the ESG agenda of
its portfolio firms. Consequently, ESG KPIs are developed with each portfolio firm and regularly
reported on. In this regard, there are both common ESG KPIs that are tracked for every portfolio firm
and KPIS that are tracked depending on the sector or the business model of a firm. Generally, the
ESG characteristics are equally weighted and considered as a triad. Yet, if one pillar stands out in
terms of negative experiences, the interviewee mentions the environmental one, due to the associated
risks.
With regard to the reasons for the relevance of the ESG performance of target firms, the interviewee
argues that there are certain ESG related risks. In this context, the interviewee mentions violations of
environmental regulations such as incorrect storage or increased carbon emissions which can lead to
factory shut downs or financial sanctions. Additionally, he argues that reputational damage due to
socially irresponsible behavior can negatively affect both the top and bottom line of a firm. In addition
to these risks, the interviewee addresses the value creation potential of ESG engagement. He states
that high ESG performance may result in reduced interest rates for loans which in turn translate into
lower cost of capital. Further, the interviewee argues that value can especially be created where the
products and services of a firm specifically address areas related to ESG issues. In this context, the
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interviewee refers to an example of a firm manufacturing wood fiber insulation boards, which are
sold at a premium being the most environmentally friendly product of their kind on the market. Hence,
the development of products in line with ESG objectives may enhance the value proposition of firms
and increase customers’ willingness to pay. However, the interviewee notices that if the same market
perception of products could be achieved with fewer investments in ESG initiatives, private equity
investors would reduce ESG investments, as they are ultimately motivated by financial returns. Thus,
ESG investments must pay off economically to be considered in the first place. In this regard, the
interviewee adds that the subject of ESG is not received particularly well by the managers of the
private equity fund’s portfolio firms as it keeps them from their operative business leading to
problems in enforcing ESG efforts. With regard to measuring the value created by ESG engagement,
the interviewee explains that the value attributed to ESG initiatives can be measured whenever these
can be linked to monetary figures. As an example, the interviewee mentions respective value that can
be measured by the reduction in interest payments.
Regarding the relationship between ESG performance and acquisition premia, the interviewee states
that it happens very rarely that a firm is traded higher respectively a premium is called because of its
ESG performance, i.e. ESG performance is not yet factored into the acquisition price. Simultaneously,
due to limited incentivization, the private equity fund would not pay a premium for superior ESG
performance. In this respect, the interviewee explains that he has not experienced any differences in
the relation between best-in-class vs. good ESG performance and firm performance. Yet, when a
potential target firm shows poor ESG performance with short-term improvement potentials,
deductions in the acquisition price would be applied and improvement targets would be included in
the share purchase agreement. In the case of no short-term improvement potential, the firm would not
be considered as a potential target firm in the first place. Additionally, firms of certain industries such
as weapons, alcohol, gambling and drugs are excluded as potential target firms through negative
screening. Finally, the interviewee points out that the overall subject of ESG is dealt with differently
depending on the type and size of the acquiring firm. Hence, ESG issues are increasingly present for
large-cap firms and less so for small- or mid-cap firms. This circumstance is driven by public
perception as large-cap firms are more strongly represented in the media, and are thus exposed to
greater potential reputational damage.
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Gender: Male
Profession: Head of Legal M&A
Firm: Electrical and Power Engineering Firm
The interviewee introduces himself as Head of Legal M&A at a corporate in the energy sector. He
explains that ESG considerations increasingly become relevant and are embedded in the strategic
direction of the firm that he is employed by. Hence, his compensation comprises a fixed and a variable
component, where the latter is dependent on his achievement of ESG related objectives. Thus, he is
increasingly expected to consider ESG characteristics in his daily business activities and therewith in
the setting of M&A decisions. In this regard, he notices that it is very difficult to measure ESG related
objectives.
With respect to M&A transactions, the interviewee notices that ESG characteristics are, per se, not
included in the valuation of target firms. Besides, there is not yet a dedicated ESG related workstream,
i.e. there is no systematic approach to assess and measure the ESG performance of target firms.
However, ESG characteristics are indirectly comprised in other workstreams such as in the human
resources or legal due diligence. Further, the interviewee states that the discussion about adding a
dedicated ESG workstream to the due diligence process has just begun a couple of months ago.
Additionally, the interviewee states that one would dissociate from possible target firms that are not
acting to the firm-level ESG standards. As an example, he mentions that firms operating in the coal
business do not qualify as target firms as the firm that he is employed by refrains from this business
area to enhance its public perception. Regarding the development of how ESG issues are addressed
in the transaction process, the interviewee recognizes that the subject is increasingly moving to the
center of attention of firms across industries and that particularly larger firms make an effort to
include ESG components in their strategies.
Regarding value creation through ESG engagement, the interviewee states that ESG engagement
leads to increased firm performance for several reasons. Firstly, firm performance increases due to
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decreased cost of capital resulting from more favorable interest conditions. Secondly, diverse
employee structures allow considering problems from different angles, which enhances the creativity
and overall quality of solutions. Thirdly, the incorporation of ESG issues into corporate strategy
increases revenues originating from the possibility to enter new markets and addressing new
customers. This is evident, for example, with regard to the energy market as the incorporation of
climate targets into the strategic orientation of the firm provides the opportunity to cater the demand
for carbon-zero solutions. Finally, ESG engagement can be used as an instrument to market and
influence the public perception of firms.
!
99
Gender: Female
Profession: Senior M&A Advisor
Firm: Global Logistics Firm
The interviewee introduces herself as a Senior M&A Advisor for a corporate in the logistics sector.
Her role in the M&A process is related to the project management of M&A transactions that are both
in the non-binding and binding stages of the acquisition. In the last two years, she has been involved
in four buy-side transactions, one of which has been successfully closed. The remainder was not
pursued for various reasons. Although, ESG characteristics are not labeled as such in the different
due diligence streams, she feels that ESG characteristics affect especially the commercial and legal
workstreams. However, there are no specific resources dedicated to assess the ESG performance of
potential target firms. In this respect, the interviewee states that within the last years, she only noticed
small changes in the way that ESG characteristics are incorporated into due diligence. However, the
interviewee states that the awareness of ESG characteristics has been improved even in the early
stages of the transaction process. In terms of measuring ESG performance, the interviewee points out
the difficulty of measuring ESG characteristics as “some of these [characteristics] are not really
quantifiable”. Accordingly, the assessment of them follows rather a qualitative, “touch-and-feel
approach”. With regard to ESG scores reported by rating agencies, the interviewee mentions that she
has little transparency over which data points are translated into final ESG scores.
In relation to value creation through ESG engagement, the interviewee argues that socially
responsible firms usually perform better, i.e. ESG performance can transform into competitive
advantage and affect financial performance. As an example, the interviewee mentions that customers
are less willing to purchase products from socially irresponsible firms, which negatively affects the
financial performance of respective firms. Yet, the interviewee mentions that it is difficult to evaluate
to what extent ESG performance and financial performance correlate. Besides, the interviewee
outlines that if a target firm is not living up to the ESG standards of an industry, there is a risk that
the brand of the acquiring firm will be damaged with the acquisition. In this case, she further assumes
100
legal risks related to governance-related malfunctions arising from employee-employer interactions
or employee compensation schemes.
In relation to the relationship between ESG performance and acquisition premia, the interviewee
states that she has experienced acquisition price discounts for poor ESG performance. Conversely,
she says that when the ESG performance of target firms is above average, the relationship between
ESG performance and acquisition premia is less clear. In this regard, the interviewee argues “there
might be the price premium, I just don’t know how to quantify that it actually came from this
performance [ESG performance]”. The interviewee points out that when assessing a target firm, it
finally comes down to its financials. When a target firm shows superior ESG performance which is
not reflected in its financials then there is a disconnect, as it should essentially translate into enhanced
financial performance.
101
Gender: Male
Profession: M&A Associate
Firm: Corporate Finance Advisory Firm
The interviewee introduces himself as an M&A Associate with three years of experience as a
sell-side advisor. He explains that he notices that acquiring firms increasingly assess ESG
characteristics in due diligence. Accordingly, the interviewee focuses on demonstrating the
ESG characteristics of sell-side parties to the buy-side advisors. In his experience, there are
more and more transactions where a separate ESG due diligence takes place. In this regard, his
experience shows that acquiring firms do not consider ESG scores, but rather look at the
specific ESG characteristics that they want to evaluate. With respect to the relative importance
of the ESG dimensions, the interviewee states that the focus area of acquiring firms depends on
the type of target firm in question. He explains that the environmental dimension is, for
example, especially relevant for manufacturing firms, while the social dimension is relevant,
for example, in the case of a target firm with a large workforce in China, to ensure that the labor
contracts are compliant with the law. With regard to the governance dimension, the interviewee
argues that it has already been centrally anchored in due diligence for a longer period of time.
Further, he emphasizes that the three dimensions are interrelated.
Regarding the attribution of acquisition premia to the ESG performance of target firms, the
interviewee states that acquisition premia cannot be clearly attributed to the ESG performance
of target firms, even though a part of the premium might be indirectly ascribed to ESG
characteristics. However, he has experienced that acquiring firms withdraw from the
transaction process when ESG related red flags are identified. Conversely, however, above-
average ESG performance is not rewarded with a higher valuation. In terms of value creation
through ESG engagement, the interviewee mentions that ESG engagement plays a major role
in stakeholder interactions, i.e. customers consider the ESG engagement of a firm when making
purchasing decisions. Hence, ESG engagement can positively affect firm performance.
102
Gender: Male
Profession: M&A and Business Development
Firm: Energy Firm
The interviewee has 1.5 years M&A experience with a focus on joint ventures, tax and
commercial due diligence in the energy sector. Further, the interviewee has worked as an ESG
Analyst for an insurance and asset management firm. The interviewee states that he has
experienced that ESG characteristics are indirectly included in M&A decisions. Besides, the
interviewee mentions that he has started to see that ESG characteristics are included in share
purchase agreements even though these may not be explicitly labeled as such.
Regarding his experience with joint ventures, the interviewee explains that the joint ventures
that he is involved with are centered around projects in the area of renewable energy. When
assessing potential joint venture partners, the focus is on understanding the degree to which a
potential partner is actually committed to sustainability indicating how much relevance will be
placed on the common project. In this context, the interviewee says “our focus is mainly on the
environmental part of the CSR department”. To assess ESG performance, desk research is used
to understand how firms publicly market themselves. Besides, sustainability or other non-
financial reports are viewed to assess the extent to which ESG characteristics have been audited
and how reliable the related data is perceived to be. In this regard, the interviewee explains that
external resources are additionally consulted to provide market intelligence. In the assessment
of ESG performance, ESG scores are not typically used as they are not aligned across different
rating agencies calling their reliability into question. However, the interviewee argues that
given increasing attention to ESG characteristics, respective data will be increasingly provided
by firms potentially enhancing the consistency and quality of the ratings.
In terms of value creation through ESG engagement, the interviewee mentions that “a lot of
value [...] is not directly measurable”. Yet, he adds that one can see a trend in the market of
showing an “extra return but you can’t really point it to that [ESG performance] with a one-to-
one link”. Specific examples of areas of value creation, that the interviewee names, include
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talent retention, decreased costs of financing and decreased operational and legal risk.
Regarding the development of ESG performance in the M&A industry, the interviewee
identifies regulatory bodies as essential to drive respective development and incentivize ESG
engagement of firms. Besides, the interviewee notices differences in the relevance assigned to
ESG issues between various sectors. In this respect, the interviewee emphasizes that
particularly high carbon sectors feel the need to become carbon neutral which increases their
focus on the environmental aspect of ESG.
!
!
104
Gender: Male
Profession: Corporate M&A Law Associate
Firm: Corporate M&A Law Firm
The interviewee introduces himself as an Associate of a corporate M&A law firm. The
interviewee states that, in his experience, it is not the standard to assess ESG characteristics as
part of the legal due diligence. The focus of the legal due diligence is on assessing legal risks
usually related to corporate details, employment contracts, intellectual property, litigations and
insurances. Yet, sometimes ESG characteristics are assessed especially in the case of a firm
being more exposed to ESG related risks. This assessment may be conducted by more
specialized resources. In this regard, the interviewee mentions one example where the
environmental dimension was important to assess as related risks played a larger role for the
specific transaction. Legal requirements with regard to ESG performance are quite limited and
ESG characteristics are due to their intangible nature difficult to measure. Thus, the assessment
of ESG characteristics is rather “fluffy”. In this context, the interviewee outlines that new
legislation related to human rights due diligence will be enforced in the near future obliging
firms to conduct internal research on human rights.401 Violations of this legislation carry very
high penalties. The interviewee argues that the anticipation of this penalty after the acquisition
of a firm would likely lead to a decreased valuation. As a result, firms will increase their
attention towards human rights due diligence to ensure compliance and decrease risk exposure.
Besides, the interviewee argues that further risks potentially impacting valuations are related to
the reputation of a firm and can be pointed out in share purchase agreements. Additionally, he
says that, although rare at the present time, acquisition price discounts are possible due to ESG
related risks that will most likely turn into financial losses. Conversely, the interviewee states
that he has never experienced that acquiring firms paid a premium for the superior ESG
performance of target firms as this is likely to be already reflected in its improved firm
performance and enterprise value.
401
The legislation on mandatory human rights due diligence for firms is promoted by the European Union
(European Union, 2020).
105
Finally, the interviewee notices that the increasing relevance of ESG performance is primarily
driven by regulatory bodies, external advisors and the perception of the general public.
Particularly, the general public takes a major role in driving the relevance of ESG performance
in the M&A industry as the related firm reputation becomes increasingly relevant for
stakeholders’ decision making. In this context, the interviewee states that although due
diligence is still more concerned with measuring tangible metrics, the development towards
additionally assessing ESG characteristics is on the rise. Besides, the interviewee has observed
an increasing focus of firms on the environmental and social dimensions of ESG. Thus, firms
and industries interested in ESG issues will grow bigger, while the ones neglecting the
relevance of the subject will become smaller. !
!
106
Gender: Female
Profession: ESG Director
Firm: Pension Fund
Interview-start time: 11:00 am
Interview-end time: 11:45 am
!
The interviewee introduces herself as the ESG Director of a Danish pension fund. Her
responsibilities include, among others, the definition of the ESG due diligence process for
investments in private equity funds. The Danish pension fund invests both in funds of funds
and directly in firms. In the scope of the funds of funds investments, the ESG due diligence is
very qualitative focusing on the processes installed at the fund level to manage the ESG
performance of portfolio firms. In the scope of direct investments, the focus of ESG due
diligence is more direct based on a questions catalogue. This questions catalogue builds on and
adds to the SASB’s materiality map. The Interviewee outlines that she likes about the SASB’s
materiality map that it is not a rating of ESG performance but the focus is purely on financially
material issues within given sectors. Further, the interviewee explains that she was involved in
the development of a questionnaire to gather ESG data for illiquid assets with the aim of
building a database as a basis for discussion with the funds and portfolio firms in which the
Danish pension fund is invested. In this respect, the interviewee notices the need to enhance
ESG knowledge to meet the current market development and increasing requirements related
to ESG disclosure.
With respect to ESG due diligence, the interviewee argues that the focus of ESG due diligence
is industry dependent. Hence, in the technology sector the focus is primarily on the social and
governance dimension while in the manufacturing sector the focus is mainly on the
environmental and social dimension. Regarding the investment process, the interviewee
explains that the Danish pension fund follows a gate structure, i.e. at each gate certain risks
must have been evaluated to proceed with the investment process. Additionally, a risk rating
system is installed. For high risk investments, certain issues need to be solved before the
investments can be approved, while for medium risk investments, the investments can be
executed, but specific agreements for the relevant firms that need to be resolved during the asset
management period need to be included in the investment contracts. Low risk investments can
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be proceeded without concern, and potential issues can be discussed during the asset
management period. In the assessment of investments, ESG scores reported by rating agencies
are solely used as additional inputs as the Danish pension fund has in-house resources dedicated
to the analysis of ESG data. Further, the interviewee explains that the reported ESG scores are
only available for public firms and vary between the different rating agencies. In this regard,
the interviewee adds that she does not always agree with the assessment methodologies of the
rating agencies. Therefore, she states that she is very cautious about relying on them. The ESG
scores reported by rating agencies depend on very specific requirements for different sectors
and do not consider the underlying business models of firms. In this context, the interviewee
gives the example that rating agencies would give a firm a poor ESG rating if a corruption case
had become public, while the Danish pension fund would investigate whether the firm had
implemented mechanisms to prevent further cases of corruption from occurring and would
acknowledge this in its rating of the respective firm. However, the interviewee also points out
the difficulty for rating agencies to rate a large number of firms in a non-generic way.
With regard to the question whether there is a link between ESG engagement and financial
performance, the interviewee explains that the investment strategy of the Danish pension fund
is based on the belief that firms that are well governed from an ESG perspective generate higher
long-term, risk adjusted returns. However, measuring the actual value created from ESG
engagement proves to be difficult due to a lack of related data. In general, the interviewee states
that “ESG issues are related to costs [...] or even new revenue lines”, i.e. value created through
ESG engagement can relate to both risk mitigation and opportunity creation. Besides, the
interviewee argues that from her experience with private equity funds ESG issues become
particularly evident in exit processes as the ESG performance of firms can be part of price
negotiations. Hence, private equity funds aim to resolve ESG issues during the holding period
of portfolio firms to ensure that there is no price discount due to ESG related risks. Additionally,
private equity firms prepare to present the firm for sale from an ESG perspective.
With regard to the development of the role of ESG performance in the M&A industry, the
interviewee notices that ESG characteristics are already considered in due diligence but,
particularly in American firms, not explicitly labeled as such. Further the interviewee
recognizes that private equity firms are beginning to view the ESG engagement of firms as
competitive advantage and that they thus see the need to report on this subject. In this regard,
the interviewee says “all of the funds that we have talked to [...] are also considering how they
108
should gather ESG data” to demonstrate the value created by ESG engagement. In addition, the
interviewee observes that single private equity firms have started to install ESG related KPIs in
their portfolio firms and to tie the remuneration of the portfolio firm and investment managers
to corresponding KPIs. it can be observed that ESG performance is increasingly becoming the
focus of players in the investment industry. This development is encouraged especially by the
demands of limited partners.
!
!
!
!
!
!
!
!
!
!!
!
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Gender: Male
Profession: ESG Analyst
Firm: Asset Management Firm
!
The interviewee introduces himself as an ESG Analyst designing and applying ESG strategies
for an asset management firm. Additionally, he is responsible for evaluating ESG
characteristics across potential investment targets. The interviewee states “when we assess ESG
we assess [...] the full spectrum”, including the business model, the environmental, social and
governance dimension. However, depending on the firm’s exposure towards firm-specific risk
in relation to, for example, operations and geographical scope the focus areas vary. In this
context, the interviewee gives the example of European firms being more exposed to human
rights issues because European regulations are stricter in this respect than is the case in other
regions.!Regarding the assessment of ESG performance, the interviewee explains that the asset
management firm that he is employed by has an in-house scoring methodology. The in-house
scoring methodology is inspired by the rating methodology of MSCI assessing the resilience of
firms to ESG related risks. Inputs for this assessment constitute the SASB standards, firm
reports and other databases such as Bloomberg. The rating ranges from A to C with tendencies
between the scores. An A score represents the leading firms in terms of ESG performance, a B
score represents those in transition, and a C score represents firms with major ESG related risks.
To be considered investable, a firm generally must have at least a B score. However, the scores
are only an indication from which deviation is allowed as it is acknowledged that different
industries and jurisdictions have different ESG standards. For example, European firms have
higher ESG standards and thus a higher ESG performance of firms can be expected. Besides,
in the assessment of ESG performance, ESG scores reported by rating agencies are solely used
as additional inputs.
!
Regarding the relationship between ESG performance and firm performance, the interviewee
says that “the ESG score is a way to quantifying the risk, but it is not a pure link to the financial
performance”. Besides, the interviewee reflects that ESG characteristics have been considered
in the asset management firm that he is employed by for at least a decade. In this regard, the
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interviewee adds that the integration of ESG characteristics in decision making represents a
competitive advantage for firms. However, as regulation increases and investors become more
demanding in increasing ESG standards, the interviewee emphasizes the need to develop
accordingly as a firm to not lose one’s value proposition. Finally, the interviewee states that the
aim of the firm that he is employed by is with their investments to actively drive change in
firms rather than to exclude firms with poor ESG performance from the investment universe.
!
!
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Gender: Male
Profession: Head of M&A Legal
Firm: Global Logistics Firm
The interviewee introduces himself as the Head of M&A Legal of a global logistics firm. The
interviewee acknowledges the increasing importance attributed to ESG performance in the M&A
industry and points out that it is a central topic at European M&A conferences. In his experience,
having a progressive view on ESG issues is no longer a means of differentiation for firms, but a
“ticket to play” as at least formally everyone is aware of ESG issues. He attributes the increasing
attention to ESG performance to the changing expectations of both shareholders and stakeholders.
Besides, the interviewee argues that working for a value-driven firm anchors ESG engagement in
firm operations.
With respect to the integration of ESG characteristics into due diligence, the interviewee explains that
ESG characteristics are “baked into all of our workstreams one way or the other” and are “part of [...]
the legal, the compliance, the HR, the HSE, the tax, the operational [...] and many more workstreams”.
Typically, the due diligence process starts with a high-level background check of the target firm, its
management and the sellers. Additionally, a risk scoring follows comprising various parameters that
differ according to the jurisdiction and the business model of the target firm. Depending on the risk
perceived, due diligence proceeds with a varying level of detail. In this context, the interviewee states
that due diligence are generally adjusted to the target firm in question and that depending on the
potential risk areas subject matter experts are put in charge of the respective workstreams to ensure
that the target firm complies with the global minimum requirements and their own corporate
regulations. Additionally, a specific ESG policy at the firm-level and related processes are currently
developed. Related to the difficulties in assessing the ESG performance of target firms, the
interviewee explains that the majority of assessed target firms are private or family owned firms
which are “not subject to the same rules on disclosures, etc. meaning that it is [...] much more difficult
to get a feeling of [...] how compliant the target actually is”. In this regard, the interviewee states that
112
he is surprised by how little attention sell-side advisors pay to the presentation of the ESG
performance of the target firm, as it significantly impacts the appetite of acquiring firms to consider
a firm as potential target firm. Further, the interviewee tells that he has experienced that target firms
may have no written ESG policies in place but operate according to high ESG standards in practice
and vice versa.
With respect to value creation through ESG engagement, the interviewee notes that ESG related risks
may represent a setback for acquiring firms from a legal and a reputational perspective as these can
give rise to costly fines. Further, ESG strategies usually relate to more advanced compliance set-ups
and potentially lower integration costs as less efforts need to be taken to align certain standard
requirements such as data privacy between the acquiring and the target firm. However, he reflects
that ESG engagement is not considered specifically in terms of opportunity creation. Regarding the
relationship between the ESG performance of target firms and acquisition premia, the interviewee
states that acquiring firms value target firms that are well operated from an ESG perspective as ESG
engagement translates into a greater likelihood of a transaction being successful. However, the
interviewee explains that he has not yet experienced that acquiring firms pay an acquisition premium
that relates to the ESG performance of the target firm. This is due to the difficulty of translating ESG
related risks into a monetary value and taking them into account in the acquisition price. One way of
bridging this difficulty is the use of contractual agreements such as indemnities, purchase price
withholds or deductions in earn outs that protect the acquiring firm from future costs related to ESG
related risks.
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Appendix VII: Descriptive Statistics
N Mean Median Std. Dev. Min Max

Premium 552 29.39 27.57 31.00 -59.86 141.03
E score 600 32.84 26.84 25.10 0.19 98.87
S score 600 42.12 40.32 21.30 0.35 96.49
G score 600 43.86 44.16 22.12 1.71 93.78
Price-to-Book Ratio 533 2.65 1.84 3.49 0.06 25.12
Transaction Value 588 7194.33 2611.54 13011.66 3.78 69866.25
Book Value of Equity 449 6.89 6.65 2.12 -1.41 15.19
Market Value of Equity 564 7.22 7.63 2.39 0.00 11.12
Sales Growth 572 0.07 0.04 0.25 -0.54 1.18
Debt-to-Total Assets Ratio 529 0.27 0.26 0.20 0.00 0.92
R&D 151 0.02 0.00 0.04 0.00 0.24
CAPEX 564 0.05 0.03 0.06 0.00 0.34
Net Profit Margin 580 0.06 0.05 0.08 -0.77 0.75
Earnings per Share 590 0.86 0.47 2.74 1.42 10.40
Notes: This table shows the descriptive statistics of the regression model.
114

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COPENHAGEN BUSINESS SCHOOL

M. Sc. Finance and Strategic Management

The Role of ESG Performance in M&A Decisions

Number of Characters: 172,609 (incl. spaces)

May 15th, 2021

CSR Corporate Social Responsibility

1.3! Research Questions and Objectives

1.4! Scientific Method

1.5! Thesis Structure

2.1! Development and Strategic Turn of CSR

2.3! Approximation of ESG Performance through ESG Scores

2.4! Role of ESG Performance in M&A Decisions

3.1! Resource-based View

3.2! Stakeholder Theory

3.4! Managerial Opportunism Theory

4.1! ESG Engagement as a Driver of Value Creation

4.3! Effect of ESG Performance on M&A Decisions

6.1.1! Data and Sample

Year #Transactions Proportion (%) E score S score G score ESG score

Table 2: Sample distribution by industry

Industry #Target Proportion (%) #Acquirer Proportion (%)

Country #Target Proportion (%) #Acquirer Proportion (%)

6.1.2! Dependent Variable

6.1.4! Control Variables

6.1.5! Model Estimation

6.1.6! Complementary Analysis

To investigate possible interactions between variables respectively partly non-linear relationships in

6.2! Qualitative Analysis

Table 4: Regression Results

Figure 1: Relative Variable Importance

7.3! Interview Results

7.3.1! Role of ESG Performance in M&A Decisions

7.3.2! Value Creation through ESG Engagement

7.3.3! Integration of ESG Characteristics into Due Diligence

8.1! Mixed Research Results

8.3.1! Implications for Further Research

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