The backdrop for ESG deals appears to be increasingly entrenched in the challenging scenario of economic volatility, with volumes fluctuating across the world. In fact, because market dynamics continue to evolve and transform the business landscape, ESG factors continue to play an increasingly crucial role in due diligence for investors that would wish to create long-term value. As KPMG’s 2024 ESG Due Diligence Study reports, this trend is very pronounced in the Europe, Middle East, and Africa region.
The study underlines how financial investors are embracing ESG due diligence, nowadays recognizing its potential early enough in the deal process to identify sustainability-related risks and opportunities. This proactive approach is now increasingly considered a prerequisite for effective deals. Indeed, according to respondents in the EMA region, 61% cited the monetary value derived from ESG due diligence as their primary motivator-a highly notable shift toward how dealmakers approach the investment landscape.
Key Insights and Findings
Increasing Relevance of ESG Due Diligence
While there have been some economic pressures and a slowdown in general global M&A activity, the relevance of ESG due diligence has surged by far during the last 12 to 18 months. According to KPMG’s survey, dealmakers report that there is increasing pressure on ESG considerations-from being pure compliance requirements to strategic imperatives.
As regulatory frameworks change and societal expectations for more sustainability grow, companies are becoming increasingly mindful of the reputational, operational, and financial risks they face by ignoring ESG factors. Investors now consider more than just traditional financial metrics but even incorporate ESG considerations into the evaluation to ensure that businesses are sufficiently set up for growth in a rapidly changing world.
Monetary Value Recognized in ESG Due Diligence
Most striking, though, are the findings that 58 percent of respondents conclude it simply goes without saying to identify ESG-related risks and opportunities early in the transaction process. The capability to identify potential risks, be it environmental liabilities, labor issues, or governance weaknesses, can go a long way to significantly impact the valuations as well as the decisions around such deals. ESG due diligence is increasingly viewed as a tool for value creation given that most investors see clear links between sustainable business practices and improved financial outcomes.
ESG in deals is quite fast maturing. That is the ESG lens is becoming ever more crucial for investors and customers, “said Craig Mennie, Global Head of Transaction Services at KPMG Australia. “Where the difficulty arises is that the topic spreads really wide, so therefore it’s very important to know how to look at it in a focused manner. That’s why we focus on value, not values.”
The Regulatory Pressures and Corporate Strategy Adaptation
Regime pressure: In addition to the wave of demand, ESG due diligence is significantly driven by the intensifying pressure of the regulatory regimes, in particular in Europe. It is to be noted that 44% of the respondents stated that changing approaches were prompted by changing regulations. The EU Taxonomy, as well as the Corporate Sustainability Reporting Directive (CSRD), formally introduce sustainability measures and pose clear benchmarks on corporate performance about ESG.
These are no longer checklists of compliance. Rather, these regulations are influencing corporate strategies in every sector as well as infusing sustainability at the business operations and decision-making level. Besides providing assurance of clarity in reporting and increased accountability, such a shift promises to nurture long-term competitiveness.
Impact on Significant Deals Because of ESG Results
Another significant conclusion from the KPMG survey is that 45% of investors realized major deal implications through ESG-related discoveries. This highlights the fact that ESG is increasingly crucial in an investment decision, deciding whether a particular deal will work or not for investors and succeed. Investors want to view the ESG profile of a company in a much more integrated manner. They look to see where such factors could impact future performance and walk out of deals if the risks ESG poses prove too great.
Challenges in ESG Due Diligence
Deal makers still find difficulties in setting up comprehensive and effective ESG due diligence processes despite increasing prominence of ESG concerns. The lack of a standard methodology, inconsistencies in data, and sometimes undefined metrics all make it challenging for a reliable picture of ESG risks at large. Moreover, ESG includes so many items that touch on anything from the impact on the environment to labor practices and corporate governance.
The ESG consideration in transactions mainly means understanding the commercial implications that may have a deal value impact,” says Florian Bornhauser, Director and Co-Head of the Strategy Group at KPMG Switzerland. “The focus on ESG will continue to grow, and businesses should develop the proper tool and framework by measuring its impact,” Bornhauser added.
The Future of ESG in M&A
As investors get more sophisticated in their approach to ESG, the relevance of sustainability factors only grows more and more by the day to global financial markets. According to Julie Vasadi, Partner and Head of ESG Transaction Services at KPMG Australia, regarding the future of ESG in dealmaking: “ESG considerations in investment decisions have, for many investors, become non-negotiable.”. The depth and breadth with which ESG-related risks and opportunities are being evaluated have increased significantly over the past 12 months, and leading investors are driving value from this.
ESG due diligence, from now on, will frame the future of sustainable investing through being a normal part of the M&A process. It will further secure long-term value by quickly and efficiently identifying and mitigating sources of ESG risk at the early deal cycle.
Conclusion
As the global business environment unfolds, so do ESG due diligences within mergers and acquisitions. According to the KPMG 2024 ESG Due Diligence Study, several findings revealed increasing recognition among deal makers as ESG considerations are no longer a regulatory must but a source of monetary value and long-term success. With all these sustainability awareness and investors’ attention, as well as all the changes that come with it, surely, for M&A deals in the future, the ability of it to properly integrate ESG within these strategies and transactions would be a determinant.