ESG Due Diligence Is Now a Must in M&A Deals

Jan de Vries · 2026-07-06

Institutional buyers have completely changed how they assess acquisition risk. Five years ago, environmental, social, and governance (ESG) issues were often reviewed informally, if they were reviewed at all. Today, ESG is a defined workstream in most institutional M&A processes, especially where private equity sponsors, strategic buyers, or regulated-sector investors are involved. Deloitte's 2024 ESG in M&A Trends Survey found that 91% of respondents had high or very high confidence in their ability to evaluate an acquisition target's ESG profile. That's up from 74% in 2022. This shift is driven by limited partner (LP) mandates, tighter regulatory disclosure requirements, and a growing recognition that environmental liabilities, governance failures, and social risks can lead to material losses. Buyers who skipped rigorous reviews in the past often inherited carbon liabilities or labor violations that were identifiable before closing. The cost of those omissions has fundamentally changed the standard of practice. So, what's really behind this change, and what does proper ESG due diligence look like today? ### Why ESG Entered the M&A Due Diligence Process ESG has entered M&A because investors, regulators, and buyers now treat sustainability risk as part of enterprise risk. This shift is especially clear in private equity, where limited partners expect fund managers to show how ESG factors are identified, assessed, and monitored throughout the investment lifecycle. Several structural factors have forced ESG due diligence into the spotlight: - **LP and investor mandates.** Institutional LPs increasingly require ESG assessment as a prerequisite for fund compliance with responsible investment commitments. - **Regulatory pressure.** Frameworks like the Sustainable Finance Disclosure Regulation (SFDR) in Europe and emerging SEC climate disclosure rules require buyers to understand ESG exposure in acquired assets. According to PwC's Global M&A Trends report, ESG is now a top-tier priority for creating and preserving deal value. - **Reputational and financial risk.** Post-acquisition failures attract intense public scrutiny, which can damage both the target's and the acquirer's brands. - **Valuation impact.** Businesses with poor labor practices or high carbon intensity increasingly trade at a discount. Conversely, research from McKinsey & Company suggests that strong ESG propositions correlate with higher value creation. - **Integration complexity.** Identifying issues before signing allows buyers to price or structure around remediation efforts, which are often expensive and operationally demanding post-close. ### What ESG Due Diligence Actually Covers A comprehensive ESG due diligence process is typically divided into three distinct workstreams. Each one digs into a different area of risk and opportunity. #### Environmental Workstream This pillar focuses on the target's direct and indirect exposure to environmental risk. For industrial, energy, manufacturing, logistics, and real estate-heavy businesses, this review can be material to valuation. Buyers often assess: - Scope 1, 2, and, where relevant, Scope 3 emissions - Site contamination and remediation obligations - Waste disposal practices and environmental permits - Exposure to carbon pricing, regulatory phase-outs, or stranded asset risk - Water use, raw material sourcing, and deforestation exposure in supply chains #### Social Workstream The social workstream examines how the target manages people, workplace risks, and affected communities. This can include wage compliance, health and safety performance, union relations, employee turnover, diversity data, and employment-related claims. For companies with complex sourcing, buyers may also review supplier labor standards. That's especially relevant where the target depends on low-cost manufacturing, agricultural inputs, logistics networks, or suppliers in higher-risk jurisdictions. #### Governance Workstream This involves a rigorous assessment of the target's governance structures. Buyers look at board composition, executive compensation, cybersecurity policies, data privacy practices, and anti-corruption measures. Weak governance can signal deeper problems that might surface after the deal closes. ### The Bottom Line ESG due diligence isn't a checkbox exercise anymore. It's a strategic tool that helps buyers avoid nasty surprises, negotiate better terms, and build more resilient portfolios. If you're involved in M&A, treating ESG as a core part of your process isn't just smart—it's becoming essential. > "The cost of ignoring ESG risks has fundamentally changed the standard of practice."