The power of capability transfer: how cross-border M&A affects ESG standards

A new study from the Mergers & Acquisitions Research Centre (MARC) at the Business School (formerly Cass) shows that merger and acquisition deal flow between developed and emerging markets produces a positive aggregate effect on environmental, social and governance (ESG) standards.

‘Good Business: The Impact of Cross-border M&A Deals on Emerging Markets ESG Ratings’, by Dr Zhenyi Huang, Research Fellow and Professor Scott Moeller, Director of MARC at the Business School, examines the effects of cross-border M&A deal flow between firms from developed markets such as United Kingdom, USA and Australia, and emerging markets such as Brazil, India and Malaysia and the impact this has on ESG standards of emerging markets.

The first cross-border study of its kind expands upon previous firm-level research to include implications on emerging markets as a whole. The study captures M&A deals between the developed and emerging markets across the last 30 years, and the impact that they have on the aggregate ESG scores of emerging markets.

Country data were then matched with six national culture characteristics: long-term orientation, uncertainty avoidance, power distance, individualism, masculinity and indulgence.

The report highlights the following key findings:

• Developed markets still have higher ESG scores than emerging markets – thanks largely to their stronger economies – despite the improvements in standards for both developed and emerging markets. This is thanks to a rising level of global awareness on the importance of ESG issues, driven by the efforts of various campaigns, regulatory changes and collaborations such as the introduction of the Paris Agreement on Climate Change in 2015.
• The difference in ESG standards between developed and emerging markets has started to narrow, largely due to globalisation of markets. This includes cross-border M&A deal activities which offer an excellent channel through which firms from the emerging markets can learn and adopt more advanced technology and ESG practices via capability transfer in the post-deal integration stage of those deals. Over time, such a firm-level effect amplifies the aggregate ESG standard at a wider country-level for those emerging markets.
• The national culture characteristics of ‘long-term orientation’ and ‘uncertainty avoidance’ are found to have significant effects on country-level ESG, showing the benefit of people having a willingness to invest in future sustainable development. Also, having an open attitude to changes and innovation provides a more conducive environment to facilitate learning and capability transfer.

Dr Huang said the study showed the impact of responsible overseas investment and the benefits of globalisation.

“In a time of increasing awareness and prioritisation from governments, companies and the general public about ESG issues, it is clear to see the important role that cross-border M&A deal flow plays in learning, capability transfer and the shaping of society in the long-run,” Dr Huang said.

“At a national level, governments are taking a more active role in the collaboration and regulation of ESG reporting and related practices while at the same time, in the private sector, sustainability goals are emerging as one of the key considerations for managers and investors.

“Furthermore, our study shows the benefits of cross-border M&A in providing organisations with a platform to learn and benefit from their deal counterparts through capability transfer and the sharing of resources. We also demonstrate the importance that different national culture characteristics play in shaping a country’s ESG standards as driven by the behavioural preferences of an individual society.

“The study has implications for both managers and national policymakers, who must devise strategies for enhancing ESG standards, while behavioural and cultural factors need to be taken into consideration in order to optimise this process.”

‘Good Business: The Impact of Cross-border M&A Deals on Emerging Markets ESG Ratings’ is published by the Mergers and Acquisitions Research Centre (MARC) at the Business School (formerly Cass).

Request a copy of the full report on the Centre’s website.