ESG due diligence rising in priority
ESG due diligence is a growing priority for dealmakers in Australia. This aligns with dealmakers globally. In fact, 71% of investors included in the KPMG ESG due diligence study report indicated that ESG has increased in priority in their transactions over the last 12 to 18 months, despite challenges.
Despite the headwinds of challenging economic conditions and an uncertain geopolitical landscape, more than half of investors globally (58%) say the top reason they perform ESG due diligence is for the monetary value they believe ESG can bring to their investments. In fact, a majority of ASPAC investors (60%) are willing to pay a premium for a target that demonstrates a high level of ESG maturity in line with their ESG priorities – some willing to pay upwards of 10%. Further, mature investors directly link their ESG due diligence approach to their ESG strategy, tie ESG to the investment thesis and use ESG due diligence findings to directly inform post-closing action plans.
To understand how ESG due diligence is evolving in Australia, KPMG gathered insights from ESG leaders. It offers a look at the current state of ESG due diligence, reviews challenges facing investors in the market and takes a look at the solutions emerging.
ESG due diligence in Australia
In Australia, decarbonisation and climate risk – both physical and transition – have dominated the ESG conversation and with mandatory climate reporting imminent, impacted companies are increasing their efforts to ensure they achieve compliance through regulatory-driven transformation.
Investors, too, are increasingly aware of the importance of identifying climate risks and mitigating climate exposures. Modern slavery, human rights and labour practices are also growing focus areas as dealmakers look to better assess potential financial impact associated with non-compliance.
Yet, it is the opportunities for value creation that is increasingly capturing the imagination of mature dealmakers. Reinforced by intensifying progressive sentiments, dealmakers are assessing potential targets with a lens on how well they can navigate the transition to a low-carbon economy and seeking to profit from value-driven transformation.
Those with such potential can innovate using Australia’s natural advantages, such as its abundant sunshine, to enhance competitiveness in the renewable energy sector, and access new revenue streams and markets. Products with strong ESG credentials can also command premium prices.
Seeking value, not values
The appetite for ESG due diligence is rising, yet the breadth and complexity of the topics within the ESG umbrella is challenging.
Investors are struggling with:
- selecting a meaningful, yet manageable scope;
- obtaining quality data and evidence from target companies and peers; and
- quantifying potential findings and translating them into financial implications for the deal that an investment audience can understand.
KPMG professionals help clients focus on value, not values. Driven by the financial value that ESG due diligence can bring to an investment, teams bring their extensive experience and global methodologies to quickly and efficiently define a scope of work that targets value creation, which is translated into financial language and implications.
As the country prepares to implement new ESG-related reporting frameworks, starting with climate disclosures in 2025, ESG due diligence adoption and maturity is expected to grow across all stages of the investment lifecycle and market segments.
Global ESG due diligence study 2024
Download our global report to learn how leading investors are leveraging evolving ESG regulations and shifting stakeholder behaviors with a disciplined focus on financial returns, or explore the data in our interactive dashboard.
How KPMG professionals can help
As some of the world’s leading deal advisory and sustainability service providers, KPMG member firms are at the nexus of the intersection between M&A and ESG. Through their daily work, KPMG professionals are at the forefront of the developments taking place in this rapidly evolving field. They are working with many of the leading corporate and financial investors to identify and develop ESG-related deal strategies and processes that meet their unique needs and objectives.
Leading investors and dealmakers around the world look to KPMG firms to help them with the following services.
Develop a corporate sustainability strategy
For investors who do not have a sufficiently sharp corporate sustainability strategy in place, KPMG professionals can help review, develop and sharpen your corporate sustainability strategy. They can help identify which areas should be considered material. They can help align ambition with the strategic context of your sector and overall business strategy. And they can help articulate pathways toward achieving your ambition.
Link the M&A strategy to corporate strategy
For investors who have a sharp corporate sustainability strategy in place, but who have not yet explicitly linked it to their M&A strategy, KPMG professionals can help ensure your M&A strategy reflects and aligns with your corporate sustainability strategy. They can help make the linkage stronger. They can help assess acquisitions or divestitures based on sustainability-related criteria. And they can assist investors to articulate the material areas that should be reflected in the deal process.
Enhance your responsible investment strategy
KPMG responsible investment specialists guide investors in crafting a strategy tailored to your unique operating environment and the needs of your asset owners, while aligning with international best practice. Strategy components can include integration of ESG information into existing investment decision-making processes, responsible stewardship through engagement with investee companies on ESG topics, and issuance of reports on responsible investing activities.
Strengthen responsible investment policies and practices
KPMG professionals can help draft policies to bring your responsible investment strategy to life, including creating screening and rating mechanisms to assess ESG components of a prospective investment, creating a playbook on how to address issues and opportunities identified in the due diligence stage, and stewardship policies for supporting and incentivising investee companies to improve their ESG performance and disclosure.
Develop an ESG due diligence framework
KPMG professionals can help investors develop their ESG due diligence framework. For those seeking to include standard ESG due diligence approaches going forward, KPMG professionals can help identify areas that should be considered material in all transactions and those that will be material on a case-by-case basis. And they can help you consider what operational approach would be most effective for your organisation.
Perform ESG due diligence procedures
KPMG professionals can help investors execute against their framework on live transactions both buy-side and sell-side. They can help perform not only ESG due diligence procedures, but a wide range of different due diligence workstreams. And they can help enable seamless integration across the due diligence environment and leverage ESG to enhance the equity story.
Identify and quantify ESG-related value creation opportunities linked to value drivers
Both on transactions as well as during the holding period, KPMG professionals can help create a robust ESG performance baseline, identify ESG-related value potential opportunities, translate them into quantitative estimates of financial value and help realise such value creation opportunities.
Implement post-deal priorities
Making an acquisition is just the start. The pre-signing ESG due diligence findings provide the starting point for post-closing action plans. Building on a strong heritage of post-deal integration advisory, KPMG professionals can help establish post-closing action plans and can help drive their implementation alongside the investors’ in-house teams.
