ESG and the M&A market: From afterthought to strategic imperative

Environmental, Social and Governance (ESG) considerations have rapidly evolved from secondary concerns to central pillars in mergers and acquisitions (M&A). Today, ESG informs deal strategy, valuation, due diligence, and post-acquisition integration. While financial and operational metrics remain essential, they are increasingly complemented by ESG insights to support credible value creation.

ESG Regulation: The European Union’s Compliance Wake-Up Call

In the EU, regulations like the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR) have introduced robust compliance requirements, including mandatory ESG disclosures. These frameworks are driving companies to strengthen sustainability practices and improve transparency. In response, investors are placing greater emphasis on accountability, favouring long-term resilience and sustainable growth over short-term gains.

ESG as a Dealmaker: Why Sustainability Sells

Strong ESG credentials are increasingly making businesses more attractive acquisition targets. Investors recognise that poor ESG integration can lead to operational inefficiencies, regulatory penalties, and reputational damage. A 2024 Deloitte survey found that 72% of corporations had opted not to proceed with an acquisition due to concerns over a target’s ESG performance. As such, ESG-aligned strategies are now seen as essential for maintaining competitive advantage and safeguarding long-term value.

Due Diligence Reimagined: ESG in the Spotlight

Due diligence processes have evolved to reflect the growing importance of ESG considerations. ESG-related inquiries now routinely cover supply chain ethics, diversity and inclusion metrics, and climate-related practices. Where deficiencies are identified, investors may seek price adjustments, indemnities, or even withdraw from a transaction.

Legal compliance remains a critical component of ESG strategy, but it must be paired with a pragmatic and forward-looking approach. One area of increasing regulatory scrutiny is greenwashing, where companies exaggerate or misrepresent their ESG credentials. A notable example is the case of Invesco Advisers, which paid $17.5 million to the U.S. Securities and Exchange Commission for overstating the extent of ESG integration in its investment processes. Additionally, the Competition and Markets Authority’s Green Claims Code applies to businesses making environmental claims to UK consumers.

As such, ESG metrics should be a key focus during due diligence to ensure that buyers and investors are confident in the credibility and sustainability of value creation.

Conclusion: A Strategic Imperative for Dealmakers

As ESG-related risks intensify, businesses that fail to embed ESG into their transactional strategy risk falling behind. Integrating ESG from the outset and staying ahead of regulatory developments is now essential for a smooth and successful transaction. ESG is no longer a secondary consideration – it’s a strategic imperative to meet investor expectations and support long-term value.