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

Jan de Vries · 2026-07-06

Institutional buyers have changed how they assess acquisition risk. Five years ago, environmental, social, and governance issues were often reviewed informally, if at all. That's not the case anymore. Today, ESG is a defined workstream in many institutional M&A processes. Private equity sponsors, strategic buyers, and regulated-sector investors treat it as standard practice. 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 a target's ESG profile. That's up from 74% in 2022. This shift isn't accidental. It's driven by limited partner mandates, tighter regulatory rules, and a growing awareness that environmental liabilities, governance failures, and social risks can cause real financial damage. Buyers who skipped rigorous reviews have inherited carbon liabilities or labor violations that were obvious before the deal closed. The cost of those oversights has changed the game. ### Why ESG Became a Standard Part of M&A Due Diligence ESG has entered M&A because investors, regulators, and buyers now see sustainability risk as enterprise risk. Private equity is a perfect example. Limited partners expect fund managers to show how ESG factors are identified, assessed, and tracked throughout the investment lifecycle. Several structural factors pushed ESG due diligence into the spotlight: - **LP and investor mandates.** Institutional LPs increasingly require ESG assessment for fund compliance with responsible investment commitments. - **Regulatory pressure.** Frameworks like Europe's Sustainable Finance Disclosure Regulation and emerging SEC climate rules force buyers to understand ESG exposure in acquired assets. PwC's Global M&A Trends report ranks ESG as a top priority for creating and preserving deal value. - **Reputational and financial risk.** Post-acquisition failures attract public scrutiny that can damage both the target's and the acquirer's brands. - **Valuation impact.** Companies with poor labor practices or high carbon intensity often trade at a discount. McKinsey & Company research suggests strong ESG performance correlates with higher value creation. - **Integration complexity.** Spotting issues before signing lets buyers price or structure around fixes that are expensive and tough to handle after closing. ### What ESG Due Diligence Actually Covers A solid ESG due diligence process breaks into three 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 seriously affect valuation. Buyers typically assess: - 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 looks at how the target handles people, workplace risks, and community impacts. Key areas include wage compliance, health and safety performance, union relations, employee turnover, diversity data, and employment-related claims. For companies with complex supply chains, buyers also review 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 due diligence examines the target's leadership, ethics, and accountability structures. It covers board composition, executive pay, anti-corruption policies, data privacy practices, and regulatory compliance history. A strong governance framework can signal a well-run company. Weak governance often points to deeper problems that could surface after the deal closes. ### The Bottom Line ESG due diligence isn't a trend. It's now a standard part of M&A because it protects value and reduces risk. Buyers who ignore it do so at their own peril. If you're in the middle of a deal, make sure ESG is on your checklist. The cost of skipping it is too high.