Why ESG Due Diligence Is Now Standard 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 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. Deloitte's 2024 ESG in M&A Trends Survey reported that 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 requirements, and a growing recognition that environmental liabilities, governance failures, and social risk exposures can produce material losses. Buyers who previously 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. It's no longer optional. ### 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 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 lets buyers price or structure around remediation efforts, which are often expensive and operationally demanding after closing. ### What ESG Due Diligence Actually Covers A comprehensive ESG due diligence process is typically split into three distinct 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 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 ESG risk assessment of the target's leadership, ethics, and compliance structures. Buyers look at board composition, executive pay tied to ESG metrics, anti-corruption policies, data privacy practices, and shareholder rights. Weak governance can signal deeper problems that affect deal value and long-term performance. A quick story: I worked with a mid-market PE firm that almost bought a manufacturing company with great financials. But during governance due diligence, they found the CEO had been running the business without a proper compliance program for years. That discovery saved them from inheriting a regulatory nightmare. It's not just about checking boxes. ### The Bottom Line for Buyers ESG due diligence is now a standard part of M&A because the risks are real and measurable. Whether you're a strategic buyer or a private equity sponsor, skipping this step can cost you millions. The data is clear: strong ESG practices correlate with better valuations and smoother integrations. If you're not doing it yet, you're already behind. - Keep your process structured across environmental, social, and governance pillars. - Use third-party audits if internal expertise is lacking. - Document everything to satisfy LP and regulatory demands. This isn't a trend. It's the new baseline for smart dealmaking.