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

Jan de Vries · 2026-07-06

Institutional buyers have changed the way they assess acquisition risk. Five years ago, environmental, social, and governance issues were often reviewed informally, if they were reviewed at all. Today, ESG is a defined workstream in many institutional M&A processes, especially where private equity sponsors, strategic buyers, or regulated-sector investors are involved. According to Deloitte's 2024 ESG in M&A Trends Survey, 91% of respondents had high or very high confidence in their organization's 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 rules, and a growing recognition that environmental liabilities, governance failures, and social risk exposures can produce material losses. Buyers who once skipped rigorous review have often inherited carbon liabilities or labor violations that were identifiable before closing. The cost of such omissions has fundamentally changed the standard of practice. ESG isn't just a nice-to-have anymore—it's a core part of how smart buyers protect their investments. ### Why ESG Has 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. That shift is especially clear in private equity, where limited partners often expect fund managers to show how ESG factors are identified, assessed, and monitored throughout the investment lifecycle. Several structural factors have pushed ESG due diligence in M&A 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. This 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. These are often expensive and operationally demanding after closing. ### What ESG Due Diligence Actually Covers A comprehensive, sustainable M&A due diligence process is typically divided into three distinct workstreams. Each one digs into a different area of risk, and together, they give buyers a full picture of what they're getting into. ### 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 Think of it like checking a used car's engine before you buy it. You don't want to discover a leaky transmission after you've already driven off the lot. The same logic applies here: uncovering environmental liabilities early can save millions in cleanup costs and regulatory fines down the road. ### 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 ESG risk assessment. It looks at the target's leadership structure, board diversity, executive compensation, ethics policies, and anti-corruption measures. A company with weak governance is a ticking time bomb—think of it as a house with a shaky foundation. No matter how nice the paint job looks, the whole thing could collapse under pressure. ### The Bottom Line ESG due diligence isn't a trend. It's a fundamental shift in how M&A deals get done. Buyers who ignore it risk inheriting hidden liabilities that can destroy value. Those who embrace it can spot opportunities, negotiate better terms, and build stronger, more resilient portfolios. So whether you're a private equity sponsor or a strategic buyer, make ESG a standard part of your process. Your future self—and your bottom line—will thank you.