Assessing sustainability risks and potentials with ESG

Identify the ESG opportunities and risks of your target company early on in transactions for an adequate company valuation.

Identify the ESG opportunities and risks of your target early on in transactions.

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The Challenge

Environmental and sustainability factors are playing an increasingly important role in corporate transactions. Global megatrends such as the shift to a carbon-neutral economy have a direct impact on business models and the future development of companies. In addition, increasing regulation of ESG reporting in the EU and North America is driving acquisitions of sustainable target companies. Investors are also increasingly demanding that investment decisions are in line with social and environmental responsibility.

In the transaction process, investors often have only selective information about the target company prior to due diligence. This is often insufficient to adequately understand ESG risks but also ESG opportunities and therefore does not provide a reliable information basis for the transaction decision. For private equity firms, a consistent and binding ESG approach at the company level is crucial to make acquisitions in line with their own ESG strategy and to be able to report on the ESG performance of the entire portfolio.

Our solution

With ESG due diligence, KPMG offers a holistic approach that is individually tailored to the challenges and demands of investors with regard to the respective material ESG aspects. When it comes to ESG, our KPMG experts combine their proven sustainability expertise with comprehensive industry and market knowledge in the relevant specialist areas.

In the context of a transaction, ESG due diligence is of fundamental importance in order to adequately assess ESG factors. ESG factors from the dimensions of environment, social affairs, employees, business model and corporate governance must be taken into account. An in-depth understanding and analysis of the relevant ESG factors using ESG due diligence is a prerequisite for this. With our support, ESG factors are identified in the context of a transaction and can be taken into account in the decision-making process. This can:

Identify potential deal breakers and avert financial or reputational damage in a timely manner;
Implications for the enterprise value can be determined and taken into account in the valuation;
map or exclude ESG-specific risks in company purchase agreements ("SPA"); and
Value enhancement potentials in the future development of the company are identified.

Our systematic analysis in ESG due diligence is individually tailored to your needs and the ESG aspects at the target company. We support you in your ESG due diligence in the following areas:

Screening of sector- and company-specific ESG risks and opportunities: This involves looking at the ESG risk profile of the target company and the sector. Our screening of relevant aspects includes sector reports such as analysis of peer sustainability reports, media research and analysis of NGA publications, consideration of company history as well as sustainability reporting standards (e.g. SASB).
ESG due diligence along the value chain of the target company: Based on the information and data provided by the target company as well as interviews, ESG aspects are identified and evaluated in detail along the value chain. This includes, for example, the following aspects:
- ESG strategies and reporting systems
- Availability and identification of non-financial KPIs
- Compliance with due diligence requirements in the supply chains
- pollution and emissions;

Our experts provide assessments and recommendations on how potential ESG issues affect, for example, the target company's future costs and cash flows.

Our internal network of experts also offers to analyse issues such as environmental impacts in soils or processes, as well as occupational health and safety risks, as part of on-site investigations.

Reporting and ESG Reporting: ESG reporting obligations and sustainability reporting are becoming increasingly important. This includes reporting requirements under the EU Taxonomy Regulation and the Corporate Sustainability Reporting Directive (CSRD) for certain companies. The implications of a transaction on transparency obligations and the collection of the necessary data are already taken into account by KPMG experts in the due diligence phase. If required, our KPMG experts can also assist with the analysis of the target company's business activities with regard to their taxonomy relevance and taxonomy compliance.

The holistic KPMG ESG due diligence process makes it possible to identify risks at an early stage and future opportunities for value enhancement throughout the entire transaction process.