Authors: Rachel Hyde, Helen McLeod
The energy transition has created an array of M&A investment opportunities, which organisations are capitalising on to support their sustainability and climate objectives. In our latest sustainability and climate-focused M&A outlook, we look at the current environment for businesses, discuss four emerging key themes, and examine other upcoming trends that may influence M&A deal activity in 2024.
Corporates face a continued concentration of stakeholder pressure on environmental issues. This is driving businesses across all sectors to examine their existing models and determine how to best position themselves for sustainable success. For some businesses the growing emphasis on sustainability is a risk to be mitigated through operational improvements, while others see the pressure to transition as an opportunity for a competitive advantage.
Although all sectors need to rapidly decarbonise to meet global net zero targets, the energy sector is a critical contributor to global emissions. As a result, this market presents a range of attractive opportunities for corporates and investors to deploy capital, develop and diversify their business models, while generating strong investment returns.
In 2022, global energy transition-related investments reached a record $1.3tn, up 19% from 2021 levels. However, this must increase fourfold by 2030 to over $5tn annually to finance the climate target of limiting global temperature increases to 1.5℃ above pre-industrial levels.1
Consequently, management teams are turning to energy transition-related M&A to tell stakeholders about their commitment to sustainability, gain competitive advantage, accelerate growth, and enter new markets.
Although all sectors need to rapidly decarbonise to meet global net zero targets, the energy sector is a critical contributor to global emissions.
Our experts at Deloitte have witnessed several transformative stories in M&A over the last six months. They include corporates transitioning their existing business to capitalise on the energy transition while providing customers access to sustainable technologies and services alongside their traditional offering.
We also see financial sponsors chasing deals in this market. Many are looking for investment opportunities to capitalise on sustainability tailwinds, as well as leveraging energy transition-related synergies across their existing portfolios. Traditional sponsors are increasingly willing to lower their ticket sizes to capture this opportunity for growth, while others have raised dedicated climate change and decarbonisation funds with smaller ticket mandates.
We see opportunities in energy transition that range in scale and maturity - from emerging disruptors to large, developed players, presenting attractive opportunities for investors of all sizes. How investors participate in this market will depend on their investment criteria, hold period, risk appetite, and most importantly, alignment of strategic vision with the existing business/portfolio.
We’ve identified four emerging key themes to watch in energy transition-related M&A activity.
Despite the recent backdrop of a challenging economic environment for buyouts and general deal-making, the pace of capital flowing into energy transition targets hasn’t slowed down. Deals for businesses in the Energy, Resources, and Industrials sector have risen as a proportion of overall deal value from 20% in 2020 to 31% in 2023 year-to-date.9 Looking forward, we expect to see ongoing momentum as net zero target dates move closer, especially with regards to investment in those businesses set to benefit from the energy transition. Key themes including those highlighted here are expected to drive deal activity, alongside sustainable transportation, cleaner fuels (such as hydrogen), alternative food and agriculture, and green building solutions.
We also expect to see competition for high-quality, ‘green’ assets continue to grow, pushing up valuations and multiples on future deals. Investors who are interested in entering the space, but feel put off by lofty valuations, may find promising opportunities in lower-valuation sectors with transferable characteristics. Companies with existing expertise, technology, infrastructure, and customer relationships that can be repurposed or redirected for environmentally friendly activities without requiring substantial capital outlays may offer attractive prospects for value creation. This could pave the way for investors to enter the market while meeting their existing investment mandates.
The lack of supply of large-scale opportunities in the space, relative to the capital chasing these deals, has drummed up even more competition for the largest ‘green’ assets. We anticipate seeing some investors turn their focus towards slightly earlier-stage companies that they can rapidly scale through their provision of capital and support. These emerging, fragmented markets offer significant opportunity for buy-and-build strategies to consolidate the market.
We also expect to see competition for high-quality, ‘green’ assets continue to grow, pushing up valuations and multiples on future deals.
Please contact a member of our team to find out how we can help you discuss your organisation's 2023 energy transition M&A agenda.
You can also explore our other M&A market outlooks for winter 2023.