Harvesting Value: How ESG Shapes the Future M&A Process for Food and Agricultural SMEs?

Abstract

The increased focus on ¬¬Environmental, Social, and Governance (ESG) issues, highlights the importance of incorporating these factors into corporate valuation. It is essential for the accomplishment of a valuation that reflects both the value of the enterprise’s operations and its impact on society. Small- and medium sized enterprises (SMEs) play a central role in the Swedish economy and SMEs are the dominant actor in the food and agricultural sector in Sweden. Hence, SMEs transition to a more sustainable community is essential. Utilising the theories of ESG, Mergers and Acquisitions (M&A), Agency Theory, and the Value-increasing and Value-destroying, this study examines how evaluators account for ESG factors in the valuation process. The empirical findings implies that the majority of the respondents do not directly incorporate ESG factors into the financial models. These factors are instead based on subjective judgement and experience. However, some of the respondents account for ESG practices by adjusting the discount rate Weighted Average Cost of Capital (WACC) used in the DCF analysis, or through a market-based multiple approach. Based on the interviews, this thesis provides two suggestions. The first suggestion is to incorporate ESG factors into the discount rate WACC, by adjusting The Market Risk Premium in the Capital Asset Pricing Model (CAPM). Secondly, this study suggests that SMEs in the food and agricultural sector should identify what materiality issues concern their business. The sector’s materiality issues primarily concern GHG Emissions, Energy Management, and Employee Health & Safety. Based on this identification, they should perform a Double Materiality Assessment (DMA).