Companies with environmental, social and governance (ESG) credentials have been high on the list of merger targets for U.S. special purpose acquisition companies (SPACs) so far in 2021, data from Nomura Greentech showed.
U.S. IPOs by SPACs with a focus on ESG or sustainability and in sectors including environmental technology, transportation, industrials, water and energy totalled 49 in the first four months of 2021, out of a total of 306, Nomura’s data showed.
That compares with 40 in the second half of 2020.
By transaction, 32 SPAC mergers with ESG firms have been announced so far in 2021, against 31 for all of 2020, Nomura’s data showed said.
The value of the deals, at $117 billion, is more than 2.5 times that raised in 2020 and accounts for 38% of total SPAC merger volume, up from 25.3% in the second half of 2020.
Driving the ESG growth were three converging forces: lower costs, driven by technology and innovation; customer demand for sustainable products and services, and strong policy support, Jeff McDermott, Head of Nomura Greentech, said.
“With over 50 active ESG SPACs currently seeking targets, and more still to price this year, we believe… investors will continue to fund high growth ESG companies,” he added.
The growth in demand to invest in companies with a strong ESG profile has risen as policymakers drive a low-carbon economic transition to combat climate change and investors look for companies that will prosper in the new environment.
The election of President Joe Biden and subsequent commitment to accelerate U.S. efforts to cut carbon emissions has also underpinned a rush of demand to invest in funds focused on renewable energy.
A SPAC is a shell company that raises funds in an IPO to acquire a private firm, which then becomes public as a result of the merger. For the company being acquired, the merger is an alternative way to go public over a traditional IPO.
Global SPAC volumes hit $286 billion in the first four months of this year, versus $163 billion in 2020, Refinitiv data showed. Sustainable bond issuance, meanwhile, hit a record high of $264 billion in the first quarter
However, the stellar growth has drawn the ire of regulators, concerned investors were being put at risk by the relatively laxer rules that allow a SPAC to avoid more intense due diligence accompanying a normal IPO.
A Reuters analysis showed top 10 ESG SPACs have delivered a return of 4% this year, compared with a decline of 0.2% for non-ESG SPACs on average.
Jonathan Bailey, head of ESG investing at Neuberger Berman, said the U.S. asset manager had “looked at hundreds” of SPACs but invested in “very, very few”.
While a lot of companies being brought to market through a SPAC had an environmental theme, many were arguably at the venture capital stage of their growth cycle, without a proven product or positive cash flows, he said.
“So we have an appropriate scepticism both on the governance side and on some of the environmental themed offerings that are out there.”
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