The private equity funds and big players are transforming their core strategies based on powerful combination of environmental, social, and governance (ESG) demands. The rising consumer awareness, government policies, regulatory requirements, and industry perception are prompting investors to make sustainability as a major criterion for any big business transaction.

Experts who deliberated on how ESG has become a key element for M&A at the ‘NextGen Chemicals & Petrochemicals Summit 2022’ organized by Indian Chemical News on July 21, 2022 called for reshaping of strategy by involving sustainability and incorporating M&A as a cornerstone for lasting improvements.

The panel discussion themed, 'Sustainability Driving the M&A’ was moderated by Pravin Prashant, Editor, Indian Chemical News.

Explaining how global companies are dealing with ESG linked M&A, Manish Panchal, Executive Director-Investment Banking Business, Equirus Capital said,” In terms of how the companies are maneuvering the mergers and acquisitions, there are global companies that have operations across multiple locations. Then there are regional companies that have operations only in a few select locations and local companies that manufacture for local businesses. As expected the global companies are most active and vocal about decarbonization. Most of these companies have sustainability at the core of their strategy and with more buzz around it since the last couple of years, every new launch is well thought through.”

“The companies like BASF, Dupont, LANXESS, Evonik etc follow the strategy of making more from less. For example, Dupont had taken big bold energy plans right from 2008. They listed down product by product, process by process, step by step measuring utility consumption like power, water etc and set targets for each of these. Their annual budget for reducing energy consumption was more than their saving on energy. This is called organizational commitment. If they don’t achieve the energy target they exit that business or portfolio,” Panchal added.

Sharing his thoughts on Indian companies, Panchal said: “While in India we see the heightened interest of companies to quickly lap up opportunities through Joint Ventures or acquisition of portfolios, some of these products are not the end of life cycle but depend on the whole value chain. Indian companies are also looking at these portfolios as short or long term opportunities to grow. That’s how alignment is happening. In India, companies may express commitment but while allocating budget they look for ROI from sustainability projects. In a nutshell, it is not just about commitment but mindset.”  

“In most of the multinationals, before the launch of any new molecule, the sustainability assessment is done at the preliminary level. Besides from an EBITDA and ROI perspective, product reach, its use and its disposal is analyzed. We make sure that the compliance is matched in the next 5-10 years because compliance in the European region and US are far more stringent than what we see in India. So considering all these outlooks is important when a product is planned,” said Rayomand Sabawalla, Director-Finance, Huntsman India International.

As per Sabawalla, sustainability is a part of the organizational culture today because SEBI is pushing for this requirement.  

“Lot of the companies listed on NYSE or foreign exchanges abroad have sustainability drivers as a part of their packages. Many may want to get into hedge funds and the fund managers these days look at how sustainable the companies are and how they are making their products sustainable besides disclosure clauses. There are many companies which don’t go for disclosures but they get impacted in the longer run if not in the short term,” explained Sabawalla.

“In India, sustainability is not driven as a corporate social responsibility. Planting a few trees, green initiative is not a strategy, rather we need more commitment and capital funds. We need focused R&D and incorporation of sustainability within academic curricula. It will help imbibing sustainability early on. When we do the M&A, we put a lot of focus on nascent technology with a lot of R&D effort into it and how best we can get it into the market,” Sabawalla added further.

“Gone are the days when industry would do small ESG initiatives here and there. With the global focus shifting here to Indian industry, it is up to Indian players to become more responsible, leap forward and catapult the industry to the global landscape. This has been clearly evidenced when it comes to M&A. Post Covid we have seen many chemical businesses going public, private equity transactions and M&A activities. Close to 800 M&A deals are considered sustainable and over 44% of deals have been based on sustainability. There are clear indications on M&A based on sustainability, both on feasibility of transaction and also on valuation matrix. Sustainability is no more just a fashionable term or a luxury but a necessity of the day, says Mahavir Lunawat, Founder, Pantomath Group.

“A lot of times we come across platforms and businesses with increased awareness towards sustainability. So people have started using renewable sources, water treatment, and effluent treatment. Even large companies such as Tata Chemicals, Reliance Industries are taking a lot of initiatives and setting new examples. More importantly, the mid-market segment companies built plants in such a way that they are doing away with boilers and recycling the heat within the complex itself. Most of the energy is being sourced from biofuels and zero discharge. There is a clear understanding and preference for sustainability even in mid-segment. Those players who are ahead of the curve will be winners from an M & A point of view,” added Lunawat.  

“Majority of chemicals have sources based on organic and petrochemicals and there is a high dependency on them. As sooner or later we will run out of these sources, becoming sustainable is something people are looking at. Also, the dependency on import of a lot of chemicals from our neighbors. Even from a small country like Ukraine we have been importing urea and ammonia. Therefore, Indian players are looking at making their business sustainable and reducing the import dependency. Big players are looking at plus one model in their single units. If something happens at their units, they might be out of business for one month or so. That angle of sustainability is also leading to M&A activities as they are trying to de-risk their business geographically”, said Nilesh Lele, Founding Partner, RampUp Advisory LLP.

“Coming up with cleaner processes, green hydrogen will be the basis of many M&A activities. At different stages, there are many byproducts coming out and creating value out of these will be a focus too. Reduce reuse, and repurpose is a strategy being used to make use of these byproducts. Growing awareness among millennials and consumer choices will guide a lot of players to create new solutions,” added Lele.

The NextGen Chemicals & Petrochemicals Summit 2022 was supported by the leading names of the industry. The platinum partner was Elliot Group. Regulatory Knowledge Partner was GPC. Gold partners of the event included Ingenero, Premier Tech, Carbanio and Deepak Nitrite. Among the associate partners were PIP and Huntsman. The industry partners of the event included AMAI, Croplife India, and ACFI.