Amidst a backdrop of economic uncertainty and fluctuating global deal volumes, the significance of environmental, social, and governance (ESG) considerations in mergers and acquisitions continues to grow. The 2024 ESG Due Diligence Study conducted by KPMG examines these shifts, especially in the context of Europe, the Middle East, and Africa (EMA).

Financial investors are increasingly prioritizing ESG due diligence, recognizing its potential to identify sustainability-related risks and opportunities early in the deal process. This proactive approach is crucial, as 61% of respondents in the EMA region report monetary value from ESG due diligence as their primary motivator.

Key Insights and Findings

• Increasing Importance of ESG: Despite softer M&A activity and varying economic challenges, dealmakers report a rising importance of ESG due diligence over the past 12 to 18 months.
• Monetary Value Recognized: Dealmakers are motivated to conduct ESG due diligence not just for compliance but also for its potential to enhance monetary value, with 58% recognizing the importance of identifying ESG risks and opportunities early.
• Regulatory Adaptation: There is a growing response to regulatory demands, with 44% of respondents acknowledging the need to adapt due to regulatory changes.
• Significant Deal Implications: 45% of surveyed investors encountered significant deal implications due to ESG findings, emphasizing its critical role in the due diligence process.

Challenges in ESG Due Diligence

Despite the recognized value, dealmakers face significant challenges, including a lack of robust methodology and reliable data. Craig Mennie, Global Head of Transaction Services at KPMG Australia, emphasized the evolving nature of ESG assessments in deals, stating, “ESG in deal is rapidly maturing. The ESG lens is becoming increasingly important to investors and customers. The difficulty lies in the breadth of the topic, making it critical to know how to look at it in a focused manner. That’s why we focus on value not values.”

Regulatory Frameworks and Corporate Strategy

The regulatory outlook is improving with frameworks like the EU Taxonomy and Corporate Sustainability Reporting Directive (CSRD) helping formalize sustainability measures. These regulations are not only enhancing clarity but are also integrating ESG into corporate strategies across sectors, ensuring year-on-year compliance.

Related Article: 79% of Companies Now Obtain External Assurance Over Some ESG Metrics: KPMG

The Monetary Value of ESG

Florian Bornhauser, Director and Co-Head of the Strategy Group at KPMG Switzerland, reinforces the significance of ESG considerations, stating, “It is becoming increasingly clear that considering ESG on transactions primarily means understanding the commercial implications that could have a significant deal value impact.”

Future Outlook

Julie Vasadi, Partner and Head of ESG Transaction Services at KPMG Australia, reflects on the integration of ESG into investment decisions: “Considering ESG in investment decisions has become non-negotiable for many investors. The extent and depth to which ESG-related risks and opportunities are being considered has increased significantly over the past 12 months, and leading investors are driving value from it.”

As ESG due diligence becomes an integral part of the investment process, its influence on global financial markets is set to increase, shaping the future of sustainable investing.