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The rising importance of ESG due diligence in M&A transactions

In recent years, Environmental, Social, and Governance (ESG) considerations have moved from the periphery to the forefront of corporate strategy and investment decisions. This shift is particularly evident in the realm of mergers and acquisitions (M&A), where ESG due diligence has emerged as an important factor influencing the pricing of transactions. As stakeholders increasingly prioritise ethical practices, sustainability, and transparency, the traditional financial and operational metrics used to evaluate M&A deals are being supplemented by comprehensive ESG assessments.


The growing focus on ESG is driven by several converging trends. Regulatory bodies around the world are tightening requirements on environmental and social governance disclosures, pushing companies to adopt more rigorous sustainability practices. Investors, too, are demanding greater accountability and evidence of long-term value creation that transcends short-term financial performance. Additionally, consumers are showing a strong preference for companies that demonstrate a genuine commitment to ethical conduct and environmental stewardship.

As a result, companies engaged in M&A are recognising that overlooking ESG factors can lead to significant risks, including regulatory fines, reputational damage, and operational inefficiencies. Conversely, thorough ESG due diligence can uncover valuable opportunities for enhancing corporate reputation, achieving synergies, and driving innovation.

RSM’s ESG and sustainability specialist advisers, Anthony DeCandido (US), Kathy Hobbs (UK) and Sebastian Katsch (Germany) consider a few frequently asked questions in the evolving landscape of ESG due diligence in M&A; and explore the reasons behind its rising importance to ensure successful and sustainable transactions. By integrating ESG factors into their due diligence processes, companies can not only mitigate risks but also unlock new avenues for growth and value creation in an increasingly conscientious market environment.

Frequently asked questions

1. Can ESG impact an M&A transaction?

Answer: Yes. In M&A, ESG factors are used to assess a company's sustainability and ethical impact. These factors can influence a company’s valuation, operational performance, and risk profile, making them critical during the due diligence process. It’s rarely the lead investment topic but more and more it’s being discussed during diligence. The opportunity is to connect those ESG factors that connect or retract to investment value that ultimately influences a firm’s interest and pricing for a deal.

2. Why is ESG due diligence important in M&A transactions?

3. What are the key ESG factors considered in M&A due diligence?

4. How does ESG due diligence affect the valuation of a target company?

5. What tools or frameworks are commonly used for ESG due diligence?

6. How can poor ESG performance impact a merger or acquisition?

7. What role do specialist advisers and third-party consultants play in ESG due diligence?

8. What is the difference between an ESG and sustainability adviser from a professional services accounting firm and a third-party consultant?

9. How can companies integrate ESG considerations into their M&A strategy?

10. What are the potential benefits of prioritising ESG in M&A?

11. How do regulatory developments impact ESG due diligence in M&A?

It is important for companies to be aware of ESG factors and effectively prepare to incorporate these into their due diligence processes to ensure a successful transaction process through demonstrating sustainable business practices.

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