Versor Investments has published a research paper, “Merger Arbitrage and ESG Impact Investing”.

The paper is co-authored by Versor Partners Deepak Gurnani, Ludger Hentschel and Neetu Jhamb and is based on 1,991 announced mergers with market values over $500 million during the period of January 2003 to May 2022. There were 685 targets and 1,368 acquirers with available ESG scores. Scores were based on data from Refinitiv.

Versor’s research found that merger arbitrage strategies produced large increases in ESG scores in a very short time frame.

Key findings from the paper include:

On average, the ESG scores for merger targets rise by about 57% from one year before the merger to one year after completion of the merger. The improvements are similar for the overall ESG scores, the environmental scores, the social scores, and the governance scores.

A sophisticated merger arbitrage investment strategy, which actively weights deals based on predictions about deal returns and risks, increased ESG scores by about 63%, on average.
The sophisticated merger arbitrage strategy produced higher returns than the simple strategy.

For merger arbitrage, there is no evidence that large expected ESG improvements are associated with lower returns, unlike traditional ESG approaches.

Co-author Gurnani says, “It is not enough to prioritize ESG if there is no way to deliver on that promise. Though the financial sector has thoroughly embraced the importance of ESG, few strategies demonstrate meaningfully improved ESG score changes within a desirable timeframe. The merger arbitrage space represents a noteworthy exception.”

“Because of the unique dynamics associated with mergers, firms on both sides of the transactions are able to specifically target ESG priorities quickly and efficiently. We are not aware of other investment strategies that generate similarly large ESG improvements over similarly short time frames. Importantly, the large, rapid, ESG score improvements achieved through merger arbitrage strategies contrast sharply with the uncertain and slow improvements of strategies that only invest in firms with above-average ESG scores. That standard approach supports the status quo rather than making firms markedly better in terms of ESG.”