Why ESG Due Diligence Is Now Standard in M&A

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. 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, up from 74% in 2022. This shift is primarily driven by limited partner (LP) mandates, tightening regulatory disclosure requirements, and a growing recognition that environmental liabilities, governance failures, and social risk exposures can produce material losses. Buyers who previously bypassed rigorous review have often inherited carbon liabilities or labor violations that were identifiable pre-close. The cost of such omissions has fundamentally changed the standard of practice. Let's break down why this matters and what you actually need to know. ### 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 evident in private equity, where limited partners often expect fund managers to demonstrate how ESG factors are identified, assessed, and monitored throughout the investment lifecycle. Several structural factors have forced 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 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 allows buyers to price or structure around remediation efforts, which are often expensive and operationally demanding post-close. > "ESG isn't just a checkbox anymore. It's a core part of how you protect deal value and avoid nasty surprises down the road." - Jan de Vries, E-commerce Consultant ### 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 aspect of the target's operations, and skipping any of them can leave you exposed. ### Environmental Workstream This pillar focuses on the environmental due diligence for acquisitions. The environmental workstream 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 is 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 that looks at the target's leadership, board composition, executive compensation, shareholder rights, and overall ethical framework. Buyers want to see if there are skeletons in the closet, like past fraud, corruption, or compliance failures. Good governance often correlates with smoother post-merger integration and fewer regulatory headaches. ### How to Get Started with ESG Due Diligence If you're preparing for an acquisition, start by mapping out the key ESG risks specific to the target's industry. Don't try to boil the ocean. Focus on the areas that could actually hurt deal value or create liabilities. Work with internal teams or external advisors who specialize in ESG assessments. And remember, this isn't a one-time check. ESG factors evolve, so build ongoing monitoring into your post-close plan. ESG due diligence isn't just a trend. It's become a standard part of how smart buyers protect their investments. Ignoring it is like buying a house without an inspection. You might get lucky, but the odds are against you.