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Global financial and economic turmoil are top of the business agenda at present but it is widely acknowledged that climate change has the potential over the longer term to have an even greater impact, both globally and in Ireland

(All charts have been omitted) Earlier this year, KPMG surveyed Irish companies about the impact climate change is having on their business and M&A activity. A qualitative approach was taken, which involved a comprehensive questionnaire and follow up interview with some of Ireland’s most significant acquirers. Some of the companies who participated include: CRH plc; ESB; Bord na Móna; Independent News and Media plc; Bord Gáis; Musgrave Group; NTR; United Drug plc; Vodafone, AWAS Aviation Services; Balcas Timber Ltd; Greenstar Ltd; Kingspan Group plc; Mainstream Renewable Power Ltd; and Viridian (NIE plc).

Climate Change Climate change has moved from a corporate social responsibility issue to a mainstream issue that is increasingly important to Irish business and M&A activity today. Climate change will mean reduced carbon emissions and an increased focus on sustainability for all business in Ireland. Carbon itself will become an internationally traded commodity. Irrespective of business sector, these changes are going to have an impact on company performance and valuations in the future. The impact will differ, depending on the industry and business, but all Irish business will be affected to some degree. What is also clear from the survey findings is that the companies who are already identifying the opportunities and threats will be more likely to minimise the risks and maximise the potential opportunities for their own business. We see climate change as an enormous opportunity for our business. We are focused on product and market development with the lowest possible carbon footprint.

Key Findings The key findings from the report show that climate change is already having a significant impact on the businesses surveyed. Almost all (95%)participants stated they are aware of the impact of climate change on their industry and business and two thirds (67%) of organisations have actively factored climate change in to their business and acquisition plans. Some 70% of participants said that climate change is a primary or secondary consideration when making an investment decision. Many companies stressed climate change is core to their future plans, particularly for companies in the energy, manufacturing, waste management and building material sectors. Climate change is perceived to have had a greater influence to date on the international M&A environment than on the Irish M&A market. According to participants, the major reasons include the smaller scale of the Irish M&A market (and the more limited carbon-friendly investment opportunities) and the regulatory environment. Seven in ten of the participants see climate change either currently or within the next 1-5 years having a significant impact on Mergers & Acquisitions (M&A) strategy in Ireland.

The majority of participants viewed climate change as a significant opportunity for their business and are looking to position themselves with new products and technologies to take advantage of these opportunities, often through acquisition. Kingspan, for example, has recently acquired Metecno, Inc., an insulation panel manufacturer in the United States, as they see significant future growth opportunities from increased energy efficiency requirements. “The successful implementation of climate change strategies by companies will be a source of competitive advantage.”

Regulation, technology and consumer behaviour ranked as the major drivers that will move climate change towards the top of the M&A agenda in Ireland in the future. Some 90% of participants say that the risks and opportunities from climate change should be identified pre-deal or during the deal and 66% of participants believe that an environmentally-friendly strategy has significant positive implications on asset valuations.

Change drivers Only 48% of respondents see the current regulatory environment as ‘fairly supportive’ in Ireland. Participants see uncertainty around future regulation as a barrier to longterm investment in carbon-friendly assets and participants consistently stated they would like greater clarity from the government on their longerterm plans.

Respondents would also like to see a greater focus on carbon reduction incentives, which could achieve the dual purpose of reducing carbon emissions and energy costs, which in turn would help improve business competitiveness. In general, the view was that any regulatory changes should have ‘an appropriate balance between the carrot and the stick approach’. Respondents also stated any regulatory changes should consider the impact on the competitiveness of the wider Irish economy, particularly at this time. The view from participants was that the regulatory environment has improved in Ireland in recent years but still has a distance to go before it catches up with some other international investment locations. We see the Irish Government as well intentioned and aiming to do what’s right.

Participants highlighted the considerable investment in renewable energy technologies in Ireland, particularly in wind, wave and solar power. They also highlighted new investment in manufacturing production facilities / processes and building materials, which achieve the dual purpose of reducing their carbon/ environmental impact and improve energy savings. Participants also identified changing consumer behaviour as a change driver with a greater focus on sustainability, for example current advertising campaigns highlighting greener / cleaner transport fuels and coffee / tea sourced from sustainable plantations.

Sectoral Impact At a sectoral level, Energy, Transport and Tourism were identified as the sectors likely to be most impacted by climate change. Tourism was highlighted, largely because of the impact of transport and energy on the sector and our island status. Participants mentioned the impact on tour operators, airlines, car hire companies and accommodation providers. The energy sector is already being significantly impacted by emission reduction commitments under the Kyoto protocol agreement. This is driving energy companies towards greener and cleaner technologies, energy efficiency and renewable energy sources. As evidenced by recent examples, this is driving companies to reposition themselves, often through acquisition, for the future. If we do not pursue a strategy of environmentally friendly products and projects the value that has been built up will rapidly dissipate, therefore for us it is an imperative – we have to go down that road.

Given the increase in vehicle ownership and carbon emissions from the transport sector in Ireland, this sector is likely to see significant regulatory changes in the future in addition to the recent changes to vehicle registration tax, motor tax and charges for private city centre car parking facilities.

Interviewees highlighted some of the opportunities and challenges from climate change facing these sectors. For example, in tourism, given Ireland’s ‘green image abroad’, participants stated that they believe there is an opportunity for the sector to re-brand itself as an ‘eco friendly’ destination for the future. In relation to energy, participants highlighted the significant opportunities, for example the ESB’s commitment to invest €11 bn in renewables within the next 12 years, in improving energy efficiencies through better technology and promotion as well as harnessing our natural advantages, particularly in wind and wave power. The energy sector in Ireland has the potential to become more sustainable, efficient and secure over the longer term, with less dependence on imported fossil fuels.

In relation to transport, participants highlighted how improved investment could help reduce congestion and in turn support competitiveness. Energy and Tourism were also rankedas the two sectors likely to provide the most M&A opportunities in the future, as a result of climate change. Participants also noted that services companies are likely to be impacted on the front end of their value chains (i.e. sales, distribution, branding, CSR) as opposed to manufacturing companies, who are likely to see a greater impact on operations, procurement, energy, sustainability of raw materials and supply costs.

Risk and Return Acquisition opportunities - Revenue and profitability growth - Branding and customer service - Performance/process improvements - Energy savings Acquisition risks - Regulatory risk - Reputation risk - Financial risk

The major drivers of an acquisition or investment opportunity from a climate change perspective are all focused on either increasing your returns and / or reducing your cost base. Some examples include investment in greater energy efficiency, more efficient production facilities / processes / building materials, cleaner / greener transport, renewable energy, sustainable raw materials, products, packaging, branding and access to new markets. The point highlighted by participants is that achievement of these environmental opportunities can be consistent with improving your bottom line performance, which can be a win-win situation, particularly during an economic downturn. Companies are increasingly looking at ways of using climate change to give them an edge over their competition, often through an acquisition to access these opportunities. I don’t believe that the Irish market will be affected differently than other markets because of the climate change issue. It is an issue that is out there for all acquisitive companies. It affects cost structures, market perception (including that of customers), investment decisions, and potentially top line revenues. All of these factors impact valuation.

This survey has found that climate change is already impacting business and M&A activity in Ireland today and this impact will increase significantly in the near future. The large majority of Irish businesses that were surveyed are aware of these changes and are actively looking to position themselves, often through M&A activity, to minimise the risks and to take advantage of the opportunities.

Note: All quotes are taken directly from survey participants.

Liam O’ Connell is Head of Strategic Commercial Intelligence (SCI), Transaction Services at KPMG. Email: liam.oconnell@kpmg.ie