KPMG surveyed more than 600 investors across 35 geographies and interviewed 50 of the world’s leading dealmakers to understand how they use ESG due diligence to mitigate potential ESG-related risks. We also explore how they apply a value creation lens to ESG to identify long-term opportunities and financial returns.
The study findings confirm what we learned in our first international survey on ESG due diligence in the Europe, Middle East and Africa (EMA) region that was published in 2022. ESG due diligence remains an important practice for leading investors. In fact, a clear majority of respondents indicate that ESG in transactions has increased in priority in the past 12 to 18 months, and they expect it to rise in importance going forward.
The report shares our survey findings and discusses the benefits investors are realizing by performing ESG due diligence. We also offer practical solutions to some of the common challenges of ESG due diligence. Insights uncovered in interviews with leading investors are presented by giving a glance at leading investors’ ESG Value Creation Playbook, outlining the key tools and levers investors leverage to create value through ESG factors on in their transactions.
What is ESG due diligence?
ESG due diligence refers to the process of considering environmental (“E”), social (“S”) and governance (“G”)-related factors in the context of the pre-signing due diligence in an M&A transaction (buy-side or sell-side).
The topic is increasingly relevant reflecting shifts in global business, financial, and regulatory environments. It is a critical component of a company’s business strategy in ensuring responsibility and positioning for long-term success.
A due diligence identifies and mitigates risks related to environmental, social, and governance issues, preventing financial and reputational damage. It ensures adherence to growing ESG-related regulations, helping companies avoid legal penalties. Companies with robust ESG practices often see better long-term financial outcomes.
Meeting the rising expectations of customers, employees, and communities for responsible business practices is another important aspect. ESG due diligence leads to resource efficiency and improved labor practices, reducing costs and boosting productivity. Lastly, it drives innovation and opens growth opportunities in sustainable markets and sectors.
This evaluation is crucial during mergers and acquisitions (M&A) and other investment decisions to identify potential risks and opportunities related to ESG factors.
Global KPMG study on ESG due diligence in transactions
Since our initial publication on ESG due diligence in 2022, the deal environment has changed significantly. In many countries, M&A markets have decelerated in the face of higher interest rates. Geopolitical and economic uncertainty has increased, shifting the priorities of many businesses. And, in some countries, there is a vivid public debate about the merits and justification of including ESG factors in investment decisions.
Our study provides you with a global baseline on the topic and comparability between the different regions of the world. We surveyed more than 600 dealmakers globally and re-examines the relevance of ESG due diligence in transactions.
Key takeaways from the study
Some key figures from the study
Four out of five dealmakers globally indicate that ESG considerations are on their M&A agenda (see Figure 1). Even more explicitly, 71 percent of respondents report an increase in importance of ESG in transactions in the last 12 to 18 months (see Figure 2).
Figure 1: Are ESG considerations currently on your M&A agenda?
Figure 2: Has the priority of ESG in transactions changed for you over the past 12 to 18 months?
Investors expect to perform more ESG due diligence
The data clearly shows that investors expect the frequency of ESG due diligence on transactions to increase even further. Globally, 57 percent of respondents say they expect to perform ESG due diligence on most of their transactions over the next two years (up from 44 percent historically).
On the opposite side of the scale, only 6 percent say they will continue not to conduct any ESG due diligence over the same time period (down from 19 percent historically) (see Figure 3).
59%
of global respondents are willing to pay a premium for a target that demonstrated a high level of ESG maturity in line with their ESG priorities.
Figure 3: Frequency of performing ESG due diligence on transactions (past 2 years vs. next 2 years)
Applying a value creation lens to ESG – learn about best practices
We explored best practices form investors with mature ESG due diligence practices. Because finding the link between ESG and financial value is key for the most mature investors.
We looked at how leading financial investors are applying a value creation lens to ESG by combining a deep understanding of the commercial, operational, and financial risks and opportunities triggered by evolving ESG regulations and stakeholder behaviors with a disciplined focus on financial returns.
We also share insights on how some of the prevalent challenges in ESG due diligence are being mitigated by leading investors and advisors.
Figure 4: How well-connected is your pre-signing ESG due diligence approach to your ESG strategy?
Figure 5: To what extent are the findings of ESG due diligence relevant in your value creation plans of your investments?
Financial investors are more likely to integrate ESG factors into their deal strategy
Beyond ESG due diligence execution, there appear to be differences in how ESG factors impact deal strategy for corporate investors versus financial investors.
Financial investors are almost twice as likely than corporate investors to proactively seek target companies that will benefit commercially from superior ESG positioning. This often means looking for target companies that are becoming more commercially attractive due to evolving regulatory factors or customer expectations.
61%
Financial investor
28%
Corporate investor
45%
Financial investor
24%
Corporate investor
23%
Financial investor
47%
Corporate investor
11%
Financial investor
24%
Corporate investor
Note: The statistics presented for the Americas are based on North American respondents in Canada, South America and the Caribbean Islands. See notes in the methodology section of this report.
Finding the link between ESG and financial value is key for the most mature investors
Financial investors are not all the same, especially when it comes to integrating ESG in dealmaking. On one end of the spectrum, there are impact funds where the main goal is achieving positive ESG impacts through investments (as opposed to chasing maximum financial returns, although certain minimum return criteria typically must be met, too) — for example, by acquiring ‘brown’ assets and making them ‘greener’.
Then, there are funds that are primarily focused on maximizing risk-adjusted financial returns. In our experience, these funds are open to ESG-driven opportunities for financial gain, just like any other value driver. However, they do not invest in ESG performance unless the business case is proven.
For most investors, except the most ESG-focused or philanthropic, the value of ESG lies in finding areas where ESG improvements also promise adequate financial returns. In fact, finding such sources of ESG value creation is considered the holy grail that many sustainability practitioners and investors are trying to capture.
Increase your transaction value by integrating ESG factors
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Meet our expert
Florian Bornhauser
Director, Deal Advisory, Co-Head of Strategy Group in Switzerland
KPMG Switzerland