RBC dealmakers detail how ESG is transforming how they advise clients and operate internally as Wall Street's interest in sustainable deals surges

• Corporates are stepping up their demands for sustainably-focused deals, and banks are responding.
• The first quarter of 2021 saw more than $58 billion worth of sustainable M&A, Refinitiv found.
• Here’s what the wave of ESG dealmaking means for investment banks, according to two top RBC dealmakers.
• See more stories on Insider’s business page.

A wave of ESG-focused initiatives and dealmaking is sweeping the capital markets. And investment banks, recognizing that it’s having an impact on the kind of advice they provide to corporate clients, are adjusting accordingly.

A decade ago, sizing up a deal based on its ESG values would have been seen as “more confirmatory in nature, versus necessarily being more at the forefront of the evaluation of what we’re considering in determining valuation and the viability of a transaction target,” Vito Sperduto, RBC Capital Markets’ co-head of global mergers-and-acquisitions, told Insider.

But now, those three factors — environmental, social, and corporate governance — can prove key to deals. 

“Today, any of those key areas could cause a transaction not to happen,” said Sperduto, who leads a team of more than 100 RBC M&A bankers in the US and abroad.

Bankers have no choice but to consider ESG when advising on deals, as it’s increasingly becoming a significant part of the market.

There were 224 M&A deals in the first quarter of 2021 considered “sustainable” by data provider Refinitiv in its recent finance review report. That’s a 29% year-over-year increase, resulting in some $58.6 billion in deal volumes for the quarter.

And it’s not just M&A seeing the sustainable financing boom. In the debt capital markets, sustainable bond issuance reached an all-time high in the first quarter of 2021: $286.5 billion, Refinitiv found. That represents more than double the first quarter of 2020, and a 48% increase from the fourth quarter of 2020.

The Biden administration, too, has moved ESG imperatives to the forefront. President Joe Biden hosted a virtual climate summit with more than three dozen world leaders and pledged that the US will slash greenhouse gas emissions by 50% by the year 2030.

“Shareholders are engaged, business management teams are engaged, governments are engaged, and employees are really finding that they have a voice in these issues too,” said Lindsay Patrick, a managing director and head of strategic initiatives and ESG at RBC Capital Markets.

ESG is incentivizing bankers to reach across divisions within their firms

RBC Capital Markets has advised on numerous deals which were considered sustainable.

One example is the work the firm did in 2020 as the exclusive advisor to General Motors in its partnership with EVgo to build more than 2,700 new fast chargers for electric vehicles over the next five years.

Also in 2020, RBC Capital Markets exclusively advised the energy firm Total in its 51% stake purchase of the Seagreen 1 offshore wind farm project.

One upshot of ESG’s rise to relevance has meant bankers need to be willing to work across teams. Collaboration has become a key consideration for every M&A banker, Patrick said.

“Your consumer products company might be interested in procuring renewable energy, so you’re going to need to be able to go to your renewable energy team in order to be able to solve that and come up with the best advice for your clients,” said Patrick.

Investment banks — often bifurcated into “product” groups which handle services like M&A advisory or IPOs for their clients, and “coverage” groups in which bankers focus on specific industries, like technology or industrials — are seeing corporate interest for ESG services transcend both teams.

That means bankers, whether they conventionally tackle healthcare deals or media transactions or anything in between, need to have an awareness of these values and why they’re top of mind for corporate and institutional clients.

“These factors in our view are a three-legged stool,” Patrick said. “They need to be balanced on a three-legged stool, and not have one factor outweigh the others.”

Sustainability reports are proving key

However, the rise of support for ESG hasn’t come without some drawbacks. ESG has drawn criticism for the nebulousness and breadth of the term, which is massive in scope and historically has struggled with a lack of strong, widely-available data available to measure progress toward companies’ targets or public statements. ​

Patrick said that one way RBC Capital Markets aims to help fix that problem is by helping clients craft their sustainability reports. These reports, which are separate from financial statements, enable companies to disclose information on ESG metrics pertaining to subjects like emissions, diversity efforts, or health and safety.

“We know what a good sustainability report and good sustainability disclosures look like,” she said, “versus ones which I would say might be more high-level in nature.”

These reports also prove key during the due diligence process, when companies assess merger or acquisition targets.

Warning signs are becoming clear earlier as to whether a deal could bode badly from a sustainability perspective, Sperduto said. And they also hold more weight. 

Now, rather than just being a knock on a target’s valuation, finding during the diligence process that an M&A target is doing something problematic to the environment could jettison a deal altogether.

“Historically, if you found something from an environmental perspective at a target, it was the one ESG area that caused a clear hit from a valuation perspective, versus an expanded scope today,” he said. 

How banks are trying to affect positive change and model ESG-conscious behavior

In addition to providing a range of ESG-focused advisory services to clients, banks are recognizing their role in modeling good behavior internally that their clients may seek to emulate within their workplaces.

RBC Capital Markets has launched ESG-focused programming of its own, such as the PRIDE employee resource group, which stands for Proud RBC Individuals for Diversity and Equality. 

PRIDE, which was formed in 1999, counts more than 600 members at RBC in the US. Sperduto is a sponsor of the group, which offers support for LGBTQ+ and allied employees.

Efforts like PRIDE have caught the attention of clients who are eager to learn more about how they can apply lessons to their own operations, Sperduto said. 

During a client meeting with a private-equity company that RBC represents, Sperduto was asked to explain what the firm is doing in relation to diversity and inclusion.

In another case, he said, two clients approached him last summer during a period of nationwide unrest in the wake of the murder of George Floyd to understand more about how RBC was approaching the subject with its workforce and see what it could apply to its own team. 

Other banks are also taking steps of their own.

Both Citigroup and Morgan Stanley have committed to achieving net-zero greenhouse gases and financed emissions targets by the year 2050. 

Goldman Sachs has vowed not to take companies public unless they have two women or diverse individuals on their corporate boards.

“The most powerful way to talk about these topics is to talk about it from our experience ourselves, and how we’ve imparted those throughout our firm and our employees,” Sperduto said.

Patrick agreed. “These are human issues at the end of the day,” she said. “It’s the human element of banking.”

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