ESG Due Diligence Is Now Standard in M&A Deals

Jan de Vries · 2026-07-06

Institutional buyers have totally changed how they size up acquisition risk. Five years ago, environmental, social, and governance issues were often brushed aside or reviewed informally, if they were reviewed at all. That's not the case anymore. Today, ESG is a defined workstream in most institutional M&A processes, especially when private equity sponsors, strategic buyers, or regulated-sector investors are involved. It's no longer a nice-to-have—it's a must-have. According to Deloitte's 2024 ESG in M&A Trends Survey, 91% of respondents said they had high or very high confidence in their organization's ability to evaluate a target's ESG profile. That's up from 74% in 2022. The jump is huge. ### What's Driving This Shift? This shift isn't random. It's driven by limited partner (LP) mandates, tighter regulatory disclosure rules, and a growing understanding that environmental liabilities, governance failures, and social risks can cause serious financial losses. Buyers who used to skip the deep dive often ended up inheriting carbon liabilities or labor violations that were totally visible before the deal closed. The cost of those mistakes has changed the game. ESG has entered M&A because investors, regulators, and buyers now treat sustainability risk as part of enterprise risk. That's especially true in private equity, where LPs expect fund managers to show how ESG factors are identified, assessed, and tracked through the whole investment lifecycle. ### Key Forces Behind ESG Due Diligence Several structural factors have pushed ESG due diligence into the spotlight: - **LP and investor mandates.** Institutional LPs increasingly require ESG assessments as a basic condition for fund compliance with responsible investment commitments. - **Regulatory pressure.** Frameworks like Europe's SFDR and emerging SEC climate disclosure rules force buyers to understand ESG exposure in acquired assets. PwC's Global M&A Trends report says ESG is now a top priority for creating and preserving deal value. - **Reputational and financial risk.** Post-acquisition failures draw intense public scrutiny that can damage both the target's and the acquirer's brands. - **Valuation impact.** Businesses with poor labor practices or high carbon intensity often trade at a discount. McKinsey research shows strong ESG propositions correlate with higher value creation. - **Integration complexity.** Spotting issues before signing lets buyers price or structure around fixes that can be expensive and tough to manage after closing. ### What ESG Due Diligence Actually Covers A solid ESG due diligence process usually splits into three main workstreams. Each one digs into a different area of risk. #### 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 really move the needle on valuation. Buyers often look at: - Scope 1, 2, and, where relevant, Scope 3 emissions - Site contamination and cleanup 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 risks in supply chains #### Social Workstream This workstream examines how the target handles people, workplace risks, and the communities it affects. Things like wage compliance, health and safety performance, union relations, employee turnover, diversity data, and employment-related claims all come under the microscope. For companies with complex supply chains, buyers may also check supplier labor standards. That's especially important when the target relies on low-cost manufacturing, agricultural inputs, logistics networks, or suppliers in higher-risk regions. #### Governance Workstream Governance is about how the company is run. It covers board structure, executive pay, shareholder rights, ethical practices, and compliance programs. Buyers want to see if there are any red flags like conflicts of interest, weak internal controls, or a history of regulatory problems. A thorough governance review can uncover issues that might not show up on the balance sheet but could blow up later. It's a critical piece of the puzzle. ### Why This Matters Now More Than Ever The reality is that ESG due diligence isn't just a trend—it's become a standard part of doing deals. Buyers who ignore it do so at their own risk. The data is clear: skipping this step can lead to costly surprises down the road. If you're involved in M&A, whether as a buyer, seller, or advisor, getting a handle on ESG factors is essential. It's not about being trendy or ticking boxes. It's about protecting value and making smarter decisions. In short, ESG due diligence is here to stay. And for anyone serious about M&A, it's time to treat it as a core part of the process, not an afterthought.