Why ESG Due Diligence Is Now Standard in M&A Deals

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. 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 reported 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. The shift is driven by limited partner mandates, tighter regulatory disclosure rules, and a growing recognition that environmental liabilities, governance failures, and social risks can produce material losses. Buyers who once skipped rigorous review have often inherited carbon liabilities or labor violations that were identifiable pre-close. The cost of those omissions has fundamentally changed the standard of practice. ### 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 visible 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 such as 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 post-close. > "The cost of ignoring ESG risks is no longer theoretical. It's real, measurable, and can derail a deal." — Jan de Vries, E-commerce Consultant ### What ESG Due Diligence Actually Covers A comprehensive ESG due diligence process is typically divided into three distinct workstreams. Each one digs into different aspects of the target's operations. #### 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 leadership, ethics, and compliance structures. Buyers look at board composition, executive compensation, anti-corruption policies, data privacy practices, and whistleblower programs. Weak governance often signals deeper problems that can surface after the deal closes. ### How to Integrate ESG into Your M&A Process Start by making ESG a standard part of your deal screening, not an afterthought. Build a checklist that covers the three workstreams above, and involve legal, financial, and operational advisors early. Use third-party data providers to benchmark the target against industry peers. And don't forget to plan for post-close integration. Remediation costs can eat into expected synergies if you're not prepared. The bottom line is this: ESG due diligence isn't a trend. It's now a core part of responsible M&A. Ignoring it puts your deals at risk. Embracing it protects value and builds trust with investors and regulators alike.