Global ESG due diligence+ study 2024

ESG due diligence in Canada

Canada continues to strengthen its understanding and implementation of corporate ESG risk mitigation . In the early days of the responsible investing movement, the country’s larger public pension funds were among the first to recognize the impact ESG could have on enhancing revenue, reducing costs and mitigating risks. Many of Canada’s banks , corporations and investors quickly followed suit, voluntarily aligning with international sustainability standards like the Principles for Responsible Investment (PRI) and the Task Force on Climate-Related Financial Disclosures (TCFD).

As mandatory measures begin to emerge, including reporting on climate risk management for banks, the fight against forced and child labor in supply chains across all sectors, and federal and provincial carbon pricing mechanisms, the country will see even more transparency across ESG considerations. This proactive approach is leading many investors and businesses to view ESG due diligence as an effective tool for identifying opportunities for value creation rather than solely as a way to mitigate risks.

Opportunities abound in ESG

The energy transition, for example, offers ample investment opportunities in renewable energy, electric vehicles and battery storage. Government incentives at various levels further support these initiatives, offering financial benefits for energy efficiency and retraining programs. On the risk side, the country’s exposure to wildfires and extreme heat events call for robust climate risk management strategies, especially for the transportation and logistics , mining and industrial manufacturing sectors.

Despite this support for ESG due diligence, investors are challenged by the limited access to reliable data, especially when targets may not provide comprehensive information. Canada’s diverse investment portfolio spans various global markets, making it difficult to maintain consistent and comparable ESG information. In particular, smaller investors struggle with limited resources and expertise compared to larger funds.

To help navigate these challenges, KPMG in Canada uses its subject matter expertise in various sectors and sustainability issues to provide clients with insights and practical tools. The firm’s global reach and access to a diverse client base support clients with leading trends and practices to help dealmakers connect ESG findings to revenue growth, cost management and asset valuation.

Looking ahead, climate change is expected to demand increased attention in terms of physical and transition risks. The social aspects of ESG, including talent attraction and retention, is also gaining prominence. Sustainability will increasingly influence valuations – all of which will likely make ESG due diligence an essential part of investment decision-making.

As ESG in Canada evolves from a voluntary, business-led initiative to a more structured practice, investors will need to stay agile and seek the professional guidance they’ll need to help turn ESG challenges into opportunities for sustainable growth and long-term value creation.

Visit our website if you want to know more about ESG due diligence in Canada www.kpmg.ca

ESG due diligence in China

Over the past two decades, ESG due diligence has undergone a significant evolution in China. Initially, ESG disclosures were influenced by foreign investors – global private equity funds investing in China as well as Chinese investors participating in outbound opportunities. Today, voluntary ESG reporting is growing across the country.

China’s ambitious carbon targets has supported this uptake. ESG standards have been embedded into broader compliance frameworks, such as energy efficiency review, air emissions, water discharge and industrial zoning. These regulations promote sustainable development and meet global standards. For the most part they heavily emphasize environmental concerns, and as such, predominately affect high-risk sectors, such as manufacturing and energy.

With the potential to incur operational risks, loss of investor confidence as well as financial penalties, investors have come to see ESG due diligence as a compliance exercise.

Broadening the scope of ESG due diligence

As more and more investors and companies recognize the value of ESG, This perception is starting to change. Investors and consumers are calling for private equity businesses to prioritize environmental and social responsibilities. Government regulations are following suit. Guidelines are being developed to promote corporate social responsibilities, and environmental regulations are expanding to more industries.

Geopolitical uncertainties are becoming more complex, requiring investors to carefully consider these factors in their investment decisions. There are also opportunities for local and global investors: aligning to best practices boosts a company’s public image at home and enhances its appeal globally. The latter point is of particular interest for those investing in emerging sectors, including renewable energy and electric vehicles.

All together, these factors are helping corporate and private equity investors broaden their scope of ESG. As more and more investors perform ESG due diligence and use its findings as a strategic tool to create value, they will likely call on businesses to collect reliable ESG data to better assess ESG performance – such data is currently lacking. Investors should also look to their advisors for such strategic insights, in addition to providing in-depth analysis of regulatory compliance. In time, it is anticipated this experience will help investors in China embrace ESG as a core aspect of their business strategy.

Visit our website if you want to know more about ESG due diligence in China www.kpmg.cn

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 leave 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.

Visit our website if you want to know more about ESG due diligence in Finland www.kpmg.fi

ESG due diligence in France

Investors in France consider ESG issues like talent retention, social governance and environmental initiatives as integral to a company’s long-term success. This has led to marked shift in the demand and scope for ESG due diligence in the past 10 years.

For decades, businesses and investors in France were focused on environmental, health and safety factors related to tangible assets like manufacturing facilities. Then with the growing number of French signatories to the UN Principles of Responsible Investment since 2012, the scope was expanded to include the fuller ESG criteria. This sentiment led to growing demand for ESG due diligence. A trend that is helping investors mitigate the environmental, social and governance risks that face many French companies. For example, environmental risks in industries with high environmental footprints or high turnover rates and employee dissatisfaction that can impact business continuity and reputation.

On the other hand, ESG due diligence is helping mature investors uncover numerous advantages. Companies that aligned with decarbonization targets or demonstrate strong ethical supply chain practices often have enhanced reputation capital, which can translate into higher customer loyalty, better employee retention and greater overall market value. Sellers, too, win, attracting more investments in their business.

Despite this growing awareness and appreciation, ESG due diligence continues to be seen as a ‘nice to have’ exercise by less mature investors who are unsure which components to assess across the broad scope of ESG criteria. These dealmakers often allocate lower budgets to ESG due diligence compared to other due diligence streams, making it hard for advisors to provide an effective assessment of the risks and value potential of a deal.

In time, as regulatory frameworks evolve and investors become more attuned to the potential business benefits of ESG, the demand for ESG due diligence will continue to gain momentum. Expectations will likely also shift toward more comprehensive and higher-value ESG assessments that can open the door to better business outcomes and a more sustainable future.

Visit our website if you want to know more about ESG due diligence in France www.kpmg.fr

ESG due diligence in Germany

The following is the transcript from an interview with Elsa Stetinger, KPMG in Germany, about the evolution of ESG due diligence in Germany.

At a high level, could you please explain the local regulatory framework that supports ESG due diligence?

In recent years, various regulations have been enacted, such as the EU Green Deal, EU Taxonomy, SFDR, TCFD, TNFD, CSRD, CSDDD, German Supply Chain Act, CBAM and the Anti-Greenwashing Directive that was recently in 2024 enforced. These have become much more important, especially in the European Union. Those regulations are also strongly interlinked and relevant nowadays to conduct and support an ESG due diligence because those regulations request (i) transparency (ii) comparability and (iii) reporting. This, along with the identification of risks and opportunities, is the core of an ESG due diligence. These regulations are a strong signal from politicians and the countries for the need for sustainable investments and transformation that drive the future market outlook and future transactions including ESG due diligences on the buy-side and on the sell-side.

What are the key ESG risks and opportunities that companies in Germany face?

The key ESG risks in Germany include:

• Understanding the various regulatory requirements and complying to them.
• Generating and providing qualitative and quantitative data – so data availability and quality.
• Understanding the various scope items or ESG topics, and implementing those into an applicable, usable and feasible framework to analyze risks and opportunities.
• Setting concrete goals, and sustainably and sequentially achieve those goals.
• Having the sufficient resources – financially or personally – so qualified employees.

At the same time, the various regulations are a great steep template and offer a huge chance for:

• Innovation;
• Return-on investment;
• Talent attraction;
• New market expansion and growth opportunities;
• Reputational, transitional, and transformational chances; and
• Future-proof the business and contribute to a sustainable future, including environmental protection and social fairness.

Could you provide some examples of how ESG factors have influenced investment decisions and/or deal outcomes?

There are several environmental topics, such as very high emissions, main energy sources from nuclear power plants or brown coal, and severe soil and groundwater contamination that could impact the outcome of a deal. Social topics, such as human rights issues, forced or child labor as well as poor working conditions, including severe accidents and deaths within a company are an absolute deal breaker. And of course, there are various other ESG factors, such as water scarcity or poor climate mitigation, and climate adaptation measures that can influence the investment decision and the deal price.
 

What are the common challenges that companies face when implementing ESG due diligence in your local market?

Some common challenges include:

• Defining a reasonable and manageable ESG scope.
• Generating and providing robust data.
• Identifying relevant risks and opportunities by qualified people within the various environmental, social and governance topics.
• Setting priorities of measure implementation and being able to quantify findings within an ESG due diligence analysis.

How does your firm help clients navigate ESG risks and opportunities?

At KPMG in Germany, we have established a robust and at the same time flexible, ESG due diligence framework that assess the ESG-performance and status quo of a company or investment. Our ESG due diligence framework is based on the various regulations (as mentioned before) and combines and integrates the anchored environmental, social and governance requirements. Additionally, we include other KPIs that are appliable to the industry, sector and business activity. Our established robust and flexible ESG due diligence framework allows us to reveal the material risks and opportunities based on key element and color-coding system. It creates objectivity, transparency, comparability and implies the relevant building blocks as a great basis for future transformation processes and impacts of a company or investment.

What trends or developments do you foresee in next 5-10 years?

I think ESG due diligence (as a stand-alone workstream) will a be involved almost in 100% of all deals. The need is and will become very high for transparency and a real sustainable future – away from greenwashing. I think the ESG due diligence scope is constantly expanding, and more building blocks will be integrated in the ESG due diligence scope as newer and stricter regulations will become enforced. The expansion will include integrity due diligences, a stronger double and even triple materiality assessments, and of course risks and opportunities. There will be more precise benchmarking with better data quality, and customer and stakeholder analysis. I believe that various companies might not be able to exist on the market in the next five to 10 years if they do not undertake a sustainable transformation. At the same time, I believe that ESG high-performing, very innovative and sustainable companies with a smart governance structure with high-qualitative and robust data will conquer the market in the next five to 10 years.

Visit our website if you want to know more about ESG due diligence in Germany www.kpmg.de

ESG due diligence in Iceland

A growing number of investors in Iceland are aligning their investments to sustainability objectives. The upward trend comes from the country’s rising commitment to environmental sustainability, global climate action initiatives, and gender equality and other social issues.

As a result, ESG due diligence is evolving in the country. Five years ago, ESG considerations were rarely part of a deal’s due diligence process. Now, there is a promising evolution in a short period of time where investors are asking ESG-related questions during traditional due diligence exercises, such as tax and legal. More mature investors are also leveraging ESG due diligence to assess the value creation potentials in a target.

In a country ripe for sustainable innovation, investors are looking for businesses that have the potential to advance renewable energy options like geothermal or hydroelectric power. Iceland is also well-known for its strong stance on gender equality and other social equities. This social consciousness is having a greater influence on investors as they seek out targets that actively promote equal opportunities and representation across all levels.

Compliance as a first step

With financial bodies calling for updated reporting from companies big and small, the race to implement the new regulations has left many companies scrambling. Partly this is due to a cultural tendency to comply with regulations only when enforced. However, good progress has been made. Larger companies with their better access to systems and expertise have been more efficiently responding to mandates. Smaller businesses, which make up the majority of Iceland’s economy, have also been working to understand the technical standards and minimum safeguards required to comply, despite their limited access to expert resources.

As Icelandic companies adapt to these changes, the role of due diligence will become increasingly intertwined with ESG factors. A thorough understanding of ESG issues will be essential for due diligence teams to assess the fuller spectrum of compliance and sustainability aspects. Companies will also need to continue to develop their ESG practices to mitigate associated risks and fully capitalize on the sustainability opportunities ahead.

Visit our website if you want to know more about ESG due diligence in Iceland www.kpmg.is

ESG due diligence in Island Group

In jurisdictions known for their susceptibility to significant climate risks, ESG due diligence is gaining attention. The many islands within the Caribbean, together with Jersey, Guernsey, the Isle of Man and Malta make up the KPMG Islands Group, where investors and businesses are beginning to recognize the potential of ESG to attract global capital and ensure sustainable growth.

In the Cayman Islands and Bermuda, the financial services sector shows a growing awareness of ESG considerations. In the more traditional industrial and tourism-centric jurisdictions, such as Trinidad & Tobago and Jamaica, there is also a growing understanding for ESG and its importance to long-term sustainability and competitiveness. With the potential for substantial financial returns, more mature regional players and impact investors are beginning to integrate ESG factors into their investment strategies.

Progress, however, is slow due to the absence of mandatory regulations as well as global political influence. For now, ESG integration relies heavily on voluntary adoption and the foresight of investors and business leaders who are looking to open up new opportunities for growth and development.

As governments in the region begin to implement frameworks to support sustainable finance, businesses will likely begin to embed ESG principles into their core operations and investors are more likely to incorporate ESG due diligence into their decision-making, along with the more traditional financial, commercial, regulatory and tax due diligence. This shift could come faster as governments contend with the realities of climate exposure. Hurricanes, rising sea levels and extreme weather events pose significant threats to these islands. The Bahamas, for example, is still recovering from Hurricane Dorian in 2019 and may be at risk of financial default if another hurricane strikes.

An eye focused on innovation

On the upside, with plenty of sunshine and wind energy (as well as the increasingly talked-about natural resource, sea grass), the Caribbean region is teaming with untapped ESG potential into renewable energy sources like solar and wind power and the ability to create a carbon credit economy from sea grass, as is being explored in The Bahamas. Such innovations can be hindered by high costs and legacy agreements, but declining costs of renewable technologies and innovative financial strategies, such as thematic bonds, could unlock substantial growth in this sector. Governments and private investors can also come together on large-scale renewable energy projects that could help reduce reliance on imported fossil fuels, but also create sustainable jobs and stimulate economic growth.

The KPMG Islands Group professionals are helping investors understand the long-term value that comes from sustainable practices and unlock the region’s potential for sustainable growth. As more investors take advantage of these opportunities, KPMG professional will help them integrate ESG due diligence to identify potential risks and uncover opportunities for value generation.

Visit our website if you want to know more about ESG due diligence in Island Group https://kpmg.com/ky

ESG due diligence in Norway

ESG is moving up the business agenda in Norway . Already many businesses and investors comply with ESG reporting. This signals the country’s cultural commitment to sustainability and the environment. Businesses also feel a sense of national pride and responsibility to uphold Norway’s image as a responsible and ethical nation.

Even more businesses are expected to adhere to reporting in line with EU and national standards and requirements as they begin to roll out, including the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D). At the core of Norway’s new regulations is the Transparency Act, requiring companies to identify and assess actual and potential adverse impacts on human rights and decent working conditions in companies and their supply chains, among other requirements.

As welcome as these regulations may be, they are creating new challenges for companies. Businesses often struggle with understanding the depth of compliance required by new and evolving regulations. Lack of reliable data and information adds another layer of difficulty.

For example, Norway’s energy businesses often have complex, multi-tiered supply chains that deal with suppliers from countries and regions with lower transparency practices and potential human rights violations. Without a clear line of sight, companies can be exposed to reputational risks and public disapproval.

Such risks can extend to investors, putting greater importance on comprehensive ESG due diligence developed by ESG specialists that stay on top of evolving regulations and understand the geopolitical risk environment within specific sectors.

Sustainable opportunities encourage evolution

As important as it is to mitigate risks associated with these social factors, investors and businesses are looking across the broader scope of ESG to identify potential opportunities to create value for their companies. This is most notable in the country’s growing clean tech and renewable energy sectors with decarbonization innovations like electrolyzers for hydrogen production and expanding hydropower and wind energy sources.

As these and other technologies evolve, there may be growing focus on the intersection of tech investments and ESG considerations. For example, as more businesses leverage AI they may want to consider how to best power their respective data centers with sustainability in mind. Such evolutions will also shift and refine the scope of ESG due diligence to help investors maintain their sustainable and ethical commitments, while enhancing their portfolio performance.

Visit our website if you want to know more about ESG due diligence in Norway www.kpmg.no

ESG due diligence in U.K.

Investors in the UK are increasingly focusing on sustainability and ESG considerations in their investment process. As a result, ESG due diligence has jumped higher up the M&A agenda. The KPMG 2024 Global ESG due diligence study found 71 percent of respondents reported an increase in importance of ESG in transactions over the last 12 to 18 months.

There are several drivers underpinning this shift. ESG has become an important lever to create value in transactions and dealmakers are seeing higher returns for their investments when there are stronger ESG practices and positioning in place. Investors are also focused on protecting value. With increased regulations, such as the EU Corporate Sustainability Reporting Directive (CSRD), and concern for ethical considerations there are potential reputational risks that could come with non-compliance.

There has also been a significant increase in impact investing. Investors focused on impact seek companies that balance profit with purpose, and are focused on addressing global sustainability challenges, such as the energy transition.

For investors, then, failure to embrace ESG can leave tangible value on the table. It can also minimize the pool of capital, and potentially prevent a deal from closing. UK investors are turning away from some sectors, such as tobacco, gambling and fossil fuels due to ethical consideration and long-term sustainability concerns. According to the survey, more than 50 percent of surveyed investors indicated that ESG was a “deal stopper.”

Investors are also asking more of target companies. With ESG due diligence becoming a strategic, cross-function and commercially focused exercise, investors are looking for greater transparency on their climate-related practices, diversity, equity and inclusion programs, supply chains and more.

This is pressuring sellers to enhance ESG-related efforts, especially as more dealmakers plan to include ESG due diligence in deal strategies going forward. Globally, 57 percent of survey respondents say they expect to perform ESG due diligence on most of their transactions over the next two years.

Even with this rise in activity, investors are looking for greater clarity around the areas to evaluate, specifically in fast-moving deal contexts. Whereas others are looking to advisors to help quantify less tangible ESG factors, such as the impact of reputation risks or long-term environmental impacts on value. KPMG in the UK’s ESG Transaction Advisory services is placed to help, bringing you the experience and insights you need to realize value from ESG in your investments.

Visit our website if you want to know more about ESG due diligence in U.K. www.kpmg.uk