ESG, a new deal thesis variable

Thanks to many years of implementing continuous improvement and lean management programs, consumer-goods firms have been traditionally better at handling environmental and labor issues than retailers, but this is changing. Retailers have set up electricity co-generation plants, installed solar panels on manufacturing facilities, and are investing in electric delivery vans. Mondelēz International, the giant snack company that produces Oreo cookies and Cadbury chocolate, has not only vowed to use sustainably sourced ingredients, but also to derive 20 percent of global snack net revenue from “portion control products.”

In 2021, British consumer packaged goods (CPG) giant Unilever sold its low-growth tea business for $5.1 billion.¹ It also bought several high-growth businesses, including Paula’s Choice, a direct-to-consumer cosmetics company that helps the environment by recycling empty makeup bottles.² This was the latest sign of changing times in the C&R sector.

Companies increasingly deployed active portfolio management strategies to divest slow-growth units and acquire firms with a reputation for sustainability – not just to bolster their corporate image, but also to increase their bottom line. Sustainable products are good for the environment and command higher prices from consumers, which drives higher valuations.

Many companies are now actively managing their portfolios for environmental, social or governance (ESG) risks—and, for example, transitioning high-emission units to lower-carbon, climate-friendly operations. Recent M&A activity in the sector has centered on companies that specialize in reducing packaging, or recycling plastic or other waste.

In October, for example, private equity firm Nuveen Investments invested $169 million in Do Good Foods, a startup that reduces waste by upcycling surplus grocery products. Another example of the move toward sustainable M&A was the decision by McCain Foods, the world’s largest producer of French fries, to acquire a minority stake in Strong Roots, an Irish frozen-meal manufacturer that focuses on plant-based, environmentally responsible products.³ Other food companies have realized the profit potential of moving into direct-to-consumer businesses that specialize in healthy-eating alternatives, especially with the focus on wellbeing spurred by the pandemic.

A second shift is that consumer and retail (C&R) companies are looking beyond reducing harmful emissions to ask the broader question: How can we be a force for positive action? In the social sphere, C&R executives are grappling with gender and race issues and exploring how to make their firms more diverse. Creating an equitable system for previously underrepresented groups has become a major consideration, not only in business but in the wider community.

Although the general trend is clear, companies in the C&R sector, faced with diverse challenges, are adopting ESG strategies at distinctly different speeds. Many food and beverage companies, for example, conscious of the industry’s historical reputation for high greenhouse-gas emissions and concerning labor practices, are now well ahead of most apparel manufacturers in embracing sustainability. Other firms are just taking their first tentative steps to address such issues.

Looking ahead to 2022, because of the difficulties CPG companies face in transforming existing brands into popular sustainable products, the faster option is likely to be an expansion of efforts to buy brands that already have a reputation with consumers for being healthful and taking care of the planet. To fund these acquisitions, they are selling slower growth businesses to private equity buyers that have the expertise to transform them and rehabilitate their image. Count on an uptick in M&A transactions in the sector driving valuations even higher.