ESG due diligence rising in priority
ESG due diligence is a growing priority for dealmakers in Finland. This aligns with dealmakers globally. In fact, 70% of investors included in the KPMG ESG due diligence study report ESG has increased in priority in their transactions over the last 12 to 18 months, despite challenges.
To understand how ESG due diligence is evolving in Finland, 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 ahead on what investors could expect next.
Tomas Otterström
ESG Advisory Services Lead
M&A markets in Finland are decelerating in the face of higher interest rates. Geopolitical and economic uncertainty has taken its toll, shifting priorities for many businesses. And, in some countries, there is lively public debate about the merits and justifications to include ESG factors in investment decisions.
Despite these headwinds, more than half of investors globally (58%) say they perform ESG due diligence for the monetary value they believe it will bring to their investments. Also, 79% of mature investors use ESG due diligence findings to create post-closing action plans.
ESG due diligence in Finland
The trend in Finland is clear: corporate and private equity investors recognize ESG as a value driver to enhance portfolio performance. ESG due diligence is gaining traction, too, appearing in about 20 percent of all deals.
This movement is greatly influenced by the ESG regulation landscape in the EU. Like other EU countries, Finland adheres to the Corporate Sustainability Reporting Directive and directives in place in the EU.
This proactive approach goes further. Mature investors, particularly private equity houses, have integrated ESG considerations deeply into their strategies and operations. Portfolio managers, for example, have developed internal capabilities and tools to scout targets that are innovating sustainable solutions, such as smart grid technology, or using circular economy practices to minimize waste and maximize resources.
From an early stage of the deal, they assess ESG factors to guide investment decisions and help ensure that potential acquisitions align to their sustainability goals. Additionally, they leverage ESG performance to attract capital, structuring financial arrangements where ESG key performance indicators, such as diversity and climate targets, can influence capital costs.
Finland’s institutional investors, including pension funds and insurance companies, are highly sophisticated with comprehensive responsible investment policies. Using ESG strategies, including exclusionary screening, thematic investing, active engagement and ESG integration, they can better position their investments to generate financial returns while positively contributing to social and environmental outcomes.
Investors with less sophisticated practices also increasingly recognize the potential for value creation from strong ESG performance. Yet, there are challenges holding them back from capturing these opportunities through ESG due diligence. With a focus on the immediate risks, some investors struggle to recognize long-term value. Further, quantifying value of ESG factors, such as human rights and diversity in management, requires sector-specific insights and nuanced analysis that goes beyond simple compliance checks.
Adding to this challenge are budget constraints. This common issue often leaves investors depending on other due diligence workstreams to surface ESG risks, or limiting the depth of analysis within a specific ESG due diligence.
As regulations continue to evolve and investor expectations rise, companies should deepen their ESG integration. Time will also help investors mature around ESG assessments. As they do, pooling sector and ESG due diligence expertise can position them to become a benchmark for others to follow.
Key findings
1. The monetary value of identifying ESG risks and opportunities early (58% of respondents agree)
2. The ability to better respond to regulatory requirements (44% of respondents agree)
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:
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.
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 to 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.
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.
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 incentivizing investee companies to improve their ESG performance and disclosure.
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 organization.
KPMG professionals can help investors execute against their framework on live transactions. They can help perform not only ESG due diligence procedures, but a wide range of different due diligence workstreams. And they can help enable a seamless integration across the due diligence environment to enhance value.
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 realize such value creation opportunities.
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.
Contact us
Riikka Weber
Corporate Sustainability & Sustainable Finance
KPMG in Finland
Heidi Koljonen
Corporate Sustainability & Sustainable Finance
KPMG in Finland
Heidi Rantanen
Deal Advisory, Valuations
KPMG in Finland
Max Aro
M&A Integration and Separation
KPMG in Finland
