Nomura investment banking co-head predicts huge increase in ESG deals

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Large-scale mergers and acquisitions in sight: Nomura’s Jeffrey McDermott says ESG transactions are set to accelerate rapidly © Pascal Perich

In early 2020, with the world’s attention turned to the emerging terrors of the Covid-19 pandemic, Japan’s largest investment bank, Nomura, took its boldest bet in more than a year. decade.

It bought a mergers and acquisitions advisory firm specializing in environmental, social and governance (ESG) issues, called Greentech Capital Advisors. And in doing so, the Japanese bank was betting on the future behavior of companies around the world.

Nomura believed that companies, of all ages and across multiple sectors, would increasingly turn to deal-making as part of their campaigns to increase their environmental and sustainability credentials. For the bank, this was the first attempt at a major overseas acquisition since its takeover of the Asian and European assets of Lehman Brothers in 2008. This transaction cost Nomura dearly, in financial and reputational terms, and sent its international division on a succession of nonprofit operations. years.

The ambition behind buying Lehman was for Nomura to compete with bulge bracket giants JPMorgan and Goldman Sachs as the global investment banking titan. It has since abandoned that vision and, under the leadership of its managing director and former investment banking director Kentaro Okuda, has taken a risk on a strategy that could ultimately prove much more transformative.

Although relatively small at around $100 million, the purchase of Greentech – and the move to position Nomura as a global heavyweight in green finance and ESG-related M&A – has become a central part of its new growth strategy.

Nomura’s assumption is that mergers and acquisitions – and financing deals related to clean energy, innovative green technologies and next-generation transportation – will dramatically increase in volume and value.

Originally, Greentech focused on business in the United States, where Nomura had long dreamed of wielding greater clout. But, in addition to using Greentech to pursue this, Nomura plans to use its strength in Asia to expand ESG-focused investment banking work. These transactions in the region are expected to accelerate rapidly.

“We are hiring bankers at a time when our clients are trying to transform their business models and other banks may not be taking this as seriously,” said Jeffrey McDermott, Global Co-Head of Investment Banking at Nomura and founder of Greentech, which is based in New York.

“What we’re seeing in this transformation of the economy are sectors blending together to provide low-carbon solutions, such as storage, utility software and electric vehicle (EV) charging.” He adds that such a process will inevitably generate large-scale mergers and acquisitions.

In particular, he says, brokering and financing innovation focused on agricultural systems transformation will require deep expertise. Climate change will force a profound change in how the world feeds itself and how it ensures sufficient supplies of water to manage this transition.

McDermott says trillions of dollars will need to be invested in this effort. Advanced transportation – the business of moving goods around the world with more efficiency and less impact on the environment – ​​will also become a center of gravity for transactions.

The rise of ESG and other thematic investment strategies, he says, will trigger significant corporate restructuring. “One of the things we are looking for is the sale of companies that are bad for ESG reasons. [A problem] with these highly inefficient and carbon-intensive businesses, terminal values ​​are going to be altered . . . the valuation implications are serious.

The trajectory envisaged by Nomura is partly based on analysis produced by the Boston Consulting Group and the Global Financial Markets Association in late 2020.

Their report notes that the 2016 Paris Agreement calls for action to limit global temperature rise to less than 2°C above pre-industrial levels, and to continue efforts to limit it to 1.5°C.

Implicit in this call to action, the report says, is a comprehensive transformation of the global economy. This, in turn, will rely heavily on the financial sector and markets for the colossal volumes of capital needed.

The volume of “climate-aligned finance” – a catch-all term for financing focused on any aspect of climate change mitigation – must grow at an unprecedented scale and geographic scope: an estimated expansion between $100,000 and $150,000,000 over the next three decades.

This estimate, the report concludes, represents an average investment of around $3-5 billion per year globally to decarbonize key economic sectors, the production of which generates 75% of global emissions.

In addition to acknowledging the raw funding velocity implied by these forecasts, McDermott says, the financial industry should prepare for the new type of transactions likely to emerge.

He cites several types of transactions that “are part of this movement and that we support”. “There are strategic acquisitions where large companies develop their ESG capabilities, and there are sales where entrepreneurs or early-stage growth-stage companies seek strategic acquirers, and there are equity investments for companies disruptive technologies.”

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