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ESG Implications of the Enerflex and Exterran Merger
Tim Monachello, CFA
Within this report, we broadly address the ESG implications of M&A transactions to stakeholders as they pertain to risk and opportunity. In conjunction with this overarching theme, we analyze the ESG implications of Enerflex Ltd.’s acquisition of Exterran Corp. announced on January 24, 2022. In our view, growing stakeholder interest in ESG performance and the underlying implications for risk and value creation means that ESG analysis should be viewed as a critical aspect of M&A analysis for investors.
The ESG Implications of M&A Transactions
While we believe traditional financial analysis is fundamental and will remain indispensable in M&A analysis, we believe ESG analysis in M&A transactions is critically important to understanding the long-term risks, opportunities, and the ultimate value of business combinations. Within the report, we identify seven key ESG implications of M&A transactions and related implications to the EFX/EXTN merger including 1) business mix impacts to ESG exposures; 2) scale benefits to ESG performance and disclosure; 3) risks and opportunities related to best practice adoption; 4) cultural cost optimization related to cost synergy realization; 5) potential information degradation related to ESG transparency and momentum screening; 6) the potential impacts to corruption risk in international transactions; and 7) how informational asymmetry can increase environmental risk in M&A transactions.
Pro Forma ATBesg Scoring for Enerflex and Exterran Merger
Alongside our recently published fundamental merger analysis, where we note the strong value and rationale for the merger, we assess the transaction in depth from an ESG perspective here. On balance, we believe Enerflex’s announced acquisition of Exterran will have an accretive impact to its ESG scores pro forma. Within the ATBesg framework, pro forma EFX remains Tier 1 across the energy services landscape with a slightly increased overall score, improving from 23.5/30 to 24.3/30. Our analysis suggests a slightly weaker pro forma environmental score (12.3/30 from 12.4/30), a stronger pro forma social score (28.1/30 from 26.1/30), and no changes to its already strong governance score at 28/30.
ATB Capital Markets Inc. has taken a major initiative to incorporate environmental, social, and governance (ESG) criteria into its investment process – see our recent ATB ESG whitepaper. As a start, we have introduced ESG research in the Energy Infrastructure and Energy Services sectors. While ATB built its ESG analysis on SASB standards, we also found that corporate disclosures on SASB criteria were not complete, and SASB “E” and “S” criteria alone didn’t give a fair picture. Moreover, SASB’s governance criteria were too industry-specific and didn’t reflect the investor interest in evaluating governance structure and policies holistically. As a result, we developed our governance checklist based on recommendations of the CFA Institute and the International Corporate Governance Network (ICGN). We call our ESG analysis framework “ATBesg”.
Tim Monachello, CFA 403.539.8633
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