The green economy mega trend has been a deal driver for the last couple of years all over the world. However, in Germany particularly, there is increased momentum in this space, as the newly elected German government has set out to become the first and the fastest global powerhouse economy to become climate neutral.
Since its election in early December the government has already begun planning for the green transformation of the economic sectors and intends to invest €50-60bn every year. It has also brought climate and economy into the same ministry, announced the end of use of coal for power and the scrapping of all combustion engine cars by 2035.
The delivery of this green transformation project will have a significant impact on the business landscape in Germany, with many companies having to adapt quickly to change. As insurers we need to support our clients with this agenda. As the country accelerates the legal and social transition it requires of corporates and individuals, this will transform the way that insurers look at M&A deals and how they are insured.
ESG reporting to become the norm
With the transition to the green economy gaining momentum, ESG reporting on M&A deals are becoming more important, particularly in the last two years. For many industries separate ESG reports have become the new norm in sales processes and potential buyers expect their advisors to examine what ESG policies target companies have in place. This is likely to become the normal market standard for every M&A deal within the next couple of years. Going forward, the lack of an ESG report and even more the lack of stringent ESG policies will raise a major red flag for us as insurers.
The transformation to carbon neutrality is already having an impact on some German businesses which are now almost unsellable due to their reliance on fossil fuels. This is particularly so for those without a clear energy transition and business transformation strategy.
Currently, most German energy comes from coal, with the use of nuclear energy abandoned. However, the German government is planning to achieve that there will be no use of coal or nuclear energy in the next eight years. As this transition occurs there will be growing deal activity in the renewable energy sector as the demand for energy powerlines and gridlines for gas increases.
Automotive manufacturers at a crossroads
We have already been seeing an increased deal activity in the automotive industry for the last 18 months.
There is likely to be further consolidation as traditional OeMs find themselves at a crossroads with the need to invest in current engines but also to invest simultaneously in future propulsion technologies. There may be carve outs of currently profitable segments of these businesses which are cash cows, but which will not be viable in a climate neutral future.
Some of these businesses may be sellable at this stage but this is unlikely to be the case in the future. For us as insurers, we have to take a close look at the individual exposure to climate-related litigation and pollution exposures before even profitable businesses can be insured at point of sale. And this is not just for the benefit of the client. Liberty GTS has a responsibility to manage our own transition away from insuring high-carbon businesses, so this is a further consideration.
Conversely, some young companies with technology that is low emission or can reduce emissions are seeing remarkably high valuations based on their potential to grow rapidly. For insurers this is a different risk profile, one more comparable to the high valuations have been given to startup tech businesses – and we need to examine the applied multiples very carefully.
However, here there is a significant upside. The insurance industry can actively support the transformation to the green economy by securing some of the risks from this new generation of low equity, high value businesses providing better value and a greener economy.
