ESG due diligence affects M&A deals

With increasing demands from regulators and investors to provide some form of sustainability reporting and climate-related disclosures, companies pursuing mergers and acquisitions need to vet their potential targets more closely.

A recent survey by KPMG found that 59%​ of corporate investors have had deals canceled due to material findings from due diligence related to environmental, social and governance reporting, while 46% of financial investors had a deal canceled or opted for a price reduction after a material ESG due diligence finding, according to the April survey of 200 M&A practitioners, including corporate investors, financial investors and M&A debt providers. In addition, 43% of debt providers refused to finance or underwrite a deal after an ESG due diligence material finding. 

Value creation was also considered important, as 63%​ of investors said they are willing to pay a premium for companies that align with their ESG priorities.

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The findings come after the release late last month of sustainability and climate reporting standards from the International Sustainability Standards Board, and the expected release by the Securities and Exchange Commission of a final version of its climate-related disclosure rule that it proposed back in March 2022. The date of that release has reportedly been pushed back until the fall. With temperatures reaching record highs this week in the U.S. and other parts of the world, the findings shed light on how climate change reporting is becoming increasingly important for companies and investors.

There are challenges to ESG reporting, including political pushback in some states like Florida and Texas as well as by Republicans in Congress, who held hearings last week challenging ESG disclosure requirements and ESG investing.

However, the KPMG survey identified other kinds of ESG due diligence challenges, including lack of robust data, inadequate understanding of what ESG due diligence means, and difficulty selecting a meaningful scope.

Other parts of the world appear to be ahead of the U.S. according to the survey, with 82% of investors in Europe, the Middle East and Africa integrating ESG in their M&A agenda compared to 74% for the U.S. Nearly half (48%) of EMEA investors are going to conduct ESG due diligence on more than 80% of their deals, as opposed to 27% in the U.S.

The survey also found a disconnect between use of ESG considerations and actually understanding of ESG, with many investors (74%) having ESG considerations as part of their M&A agenda, but fewer (51%) actually possessing a proper understanding of ESG in their area of investment. In the future, the survey found that 27% of investors plan to perform ESG due diligence on more than 80% of their deals, compared to only 16% that did so in the past two years.

The top reasons cited by the respondents for ESG due diligence, according to the survey, were that they believe in the value of identifying risks and upsides related to sustainability pre-signing, and that their investors are requiring them to conduct ESG due diligence.