How AI and machine learning are paving way for value creation from ESG

Environment, social and governance (ESG) is transforming from check-the-box compliance to becoming a genuine source of value creation. As markets increasingly want corporates to adhere to ESG, dealmakers are pushing for long-term sustainability. Investors are looking favourably at target companies that actually incorporate ESG in mitigating risk and creating value and not just to comply with regulations.

The global acceleration toward ESG adoption is now evident in India M&A as well. A survey of India-focused funds shows that ESG considerations for private equity assets under management will increase to 90 per cent over the next five years, up from only 39 per cent in 2017.

What does this mean for M&A? As ESG measurements become far more rigorous, sophistication and complexities of the due diligence process must also increase. Dealmakers must now identify risk areas and map them to create a baseline; measure whether a company or target is meeting the baseline levels; and consider how to mitigate or improve the risks, if needed.


Bespoke AI tools
Powered by artificial intelligence and machine learning, tools to conduct commercial and legal due diligence are becoming highly bespoke. This is good news, as due diligence levels continue to rise. In fact, content on Datasite’s platform was up 40 per cent YoY across all global deals because of expanding content areas such as ESG.

India PE funds are stepping up to meet the moment with unique impact investing strategies and products. Sushma Kaushik, partner at Aavishkaar Capital, one of the earliest India VC organisations to champion impact investing, said, “We believe in building socially impactful businesses using purpose-driven capital and leveraging technology, while creating attractive investment returns. Our work epitomises our philosophy of how scale, sustainability and impact can go hand-in-hand.”

To attract PE funds, start-ups too will need to incorporate ESG into their overall business strategies. They must articulate how ESG is woven into every facet of their organisation’s operations, including its supply chain. Investors should be able to see companies consciously tie ESG to value creation, as evidence of having a well-run, robust and solid business.

India PE Report 2022, Bain & Company