Corporate Responsibility

SPACs—or Blank Check Companies—and the Surge of Socially Conscious Mandates

A special purpose acquisition company (SPAC), also known as a “blank check company,” is a shell company that launches an IPO with the sole intention of acquiring a business. SPACs came to special prominance in 2020—a “breakout year for SPAC IPOs,” according to Nasdaq—with some targeting social impact. As the year brought a renewed focus on ESG and funding opportunities, SPACs aimed at impact investing have become a core feature of the sustainable investing space.

Various SPACs have sprung up to target environmental, social, and governance (ESG) opportunities with strong investor appetite.

Assessing the SPAC Model

Having raised cash on the stock market, a special purpose acquisition company will hunt for a private firm to take public. This process typically happens within a year. For the target companies themselves, the SPAC model can be a quicker and cheaper route to funding than using a standard IPO to raise finance.

While SPACs are not new, they have dramatically increased in popularity during the COVID-19 pandemic. Various firms sought to postpone their IPOs early in 2020 amid concerns that investors would be deterred by market volatility. However, some companies realized that merging with a special purpose acquisition company could allow them to raise funds and negotiate a fixed valuation with SPAC sponsors.

These deals represented a relatively insignificant proportion of total M&A volumes in 2019, but they had lurched into the mainstream by the second quarter of 2020. The first quarter of 2021 saw another surge in popularity for SPACs, as US value reached $166 billion, exceeding all of 2020 and accounting for around 30% of total US mergers and aquisitions activity.

Analyzing ESG Impact on the SPAC Surge

Various SPACs have sprung up to target environmental, social, and governance (ESG) opportunities with strong investor appetite. More than 20 SPACs have launched with an ESG focus in the past year, raising more than $5 billion through their IPOs. The Sustainable Opportunities Acquisition Corporation (SOAC) listed on the New York Stock Exchange in a $300 million IPO in May 2020, claiming to be the first ESG special purpose acquisition company specifically to drive carbon dioxide reduction.

In March 2021, DeepGreen Metals agreed to merge with SOAC in a deal worth $2.9 billion. Set to operate as “The Metals Company,” the company will develop electric vehicle (EV) battery metals to address a looming shortage in the EV supply chain by using polymetallic nodules found unattached on the seafloor in the Pacific Ocean. According to DeepGreen, the resource is sufficient for 280 million EVs and offers a lower ESG impact than conventional mining. This could provide a low-cost supply of raw battery and wiring materials such as nickel, cobalt, copper, and manganese.

Sustainable Development Acquisition I Corp. (SDAC) completed a $316 million IPO in February of this year, forming a SPAC to target companies in water, food and agriculture, renewable energy, and environmental resource management. The SPAC also aims to support technologies that address the global challenges identified by the United Nations Sustainable Development Goals. It will draw on the global footprint of the RRG/Capricorn impact investing platform.

With demand for ESG investment opportunities seemingly exceeding supply, the special purpose acquisition company model has shifted from just a quick and cheap way to raise funding to a significant feature of the sustainable investing landscape.

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