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. This is especially true 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, 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. ### 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 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 allows buyers to price or structure around remediation efforts, which are often expensive and operationally demanding post-close. ### What ESG Due Diligence Actually Covers A comprehensive, sustainable M&A due diligence process is typically divided into three distinct workstreams. Let's walk through each one. #### 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 These factors can directly affect a company's bottom line. For example, a manufacturing plant with outdated pollution controls might face costly upgrades or fines. A logistics firm with high fuel consumption could be vulnerable to rising carbon taxes. #### 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. Think about it this way: a labor violation at a supplier's factory can quickly become your problem. The brand damage and legal costs can wipe out months of deal value. #### Governance Workstream This involves a rigorous assessment of the target's leadership, ethics, and controls. Buyers look at board composition, executive compensation, anti-corruption policies, data privacy practices, and shareholder rights. Poor governance is often a red flag for deeper problems. A company with weak internal controls might be hiding financial irregularities or regulatory non-compliance. That's why governance reviews are now non-negotiable in most institutional deals. ### The Bottom Line ESG due diligence isn't just a trend. It's a fundamental shift in how buyers evaluate risk and value. If you're involved in M&A, you need to understand these three workstreams and how they apply to your deals. The cost of ignoring ESG is simply too high. Smart buyers are integrating these assessments early in the process, before they sign on the dotted line. That's the new standard of practice.