How M&A teams use ESG due diligence

Sustainable action is becoming increasingly important - in all areas of our lives. This also applies to transactions in the area of mergers & acquisitions. An important step on the way to a successful takeover is a valid due diligence that takes sustainability aspects into account. We wanted to know what role a company's sustainability already plays in the context of due diligence. That's why we surveyed around 150 experts in the summer of 2022, both online and in qualified interviews. We have summarized the exciting results in the English-language publication "2022 EMA ESG Due Diligence Study".

One thing is clear: i.e. ESG, environmental (E), social (S) and governance (G), is now high on the agenda of decision-makers in transactions. This applies in particular to acquisitions by financial investors, where, according to the survey, 94 percent already include ESG in their considerations. This value is not surprising, because investors are willing to pay a reasonable price for sustainable companies. There are still some problems - for example, there are different approaches to integrating ESG due diligence into the existing DD frameworks. But investors are aware of the financial value and value creation opportunities of considering a company's ESG performance early in the transaction process.

The term ESG encompasses a variety of topics. This poses the question for company acquirers and their advisors as part of ESG due diligence as to which areas should be taken into account. Finding the necessary data and quantifying the results and the associated financial impact and value creation opportunities are often difficult.

According to the study results, there is much to suggest that linking ESG due diligence with the overarching sustainability strategy is a promising path. All the more so when it leads directly to concrete post-merger measures. Also positive is the identification of value creation opportunities from ESG due diligence in addition to the focus on risk mitigation. It is also evident that experienced investors rely on the use of an ESG due diligence working group instead of considering environmental, social and governance issues in separate units.

Recommendations for designing a successful due diligence:

• No transaction without ESG due diligence
• Linking ESG due diligence to the company's ESG strategy
• Derivation of concrete post-merger measures
• Not only identify risks, but also track down potential for increases in value
• Establish an ESG due diligence working group that handles all ESG issues with one exception: tax transparency is assessed as a material issue, but should be anchored in the tax working group
• Provide a sufficient number of suitable resources
• Continuously review and develop your own ESG due diligence approach

An interesting finding of the study is also that financial investors are the most advanced in developing and applying ESG due diligence. There can be different reasons for this. The fact is that many financial investors recognized early on that sustainability issues are playing an increasingly important role - also with a view to successful transactions.

Interested? Then download our study here. In addition to the results of the online survey and the interviews, you will find many tips and recommendations from company acquirers that will help you to further develop your ESG due diligence. Our experts are available for a personal conversation. Talk to us, we look forward to you.