80% of UK Dealmakers Now Prioritize ESG Due Diligence in Transactions, Reports KPMG

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• 71% of investors report increased ESG importance in transactions.
• More than 50% see ESG as a potential deal stopper.
• 57% expect to perform ESG due diligence on most transactions in the next two years.

Investors in the UK are prioritizing sustainability and ESG considerations more than ever in their investment processes, according to KPMG’s 2024 Global ESG Due Diligence Report. This shift has significantly raised the profile of ESG due diligence in mergers and acquisitions (M&A).

“ESG has become a crucial lever to create value in transactions,” the report states. Dealmakers are witnessing higher returns when robust ESG practices are in place.

Several factors drive this trend. Investors aim to protect value amid increasing regulations, like the EU Corporate Sustainability Reporting Directive (CSRD), and ethical concerns. Non-compliance can pose significant reputational risks.

Impact investing is also on the rise, with investors seeking companies that balance profit with purpose. These investors focus on addressing global sustainability challenges, such as the energy transition.

“Failure to embrace ESG can leave tangible value on the table,” the report warns. ESG considerations can minimize the pool of capital and potentially prevent deals from closing.

UK investors are moving away from sectors like tobacco, gambling, and fossil fuels due to ethical and long-term sustainability concerns. Over 50% of surveyed investors indicated ESG could be a “deal stopper.”

“Investors demand more transparency on climate-related practices, diversity, equity, inclusion programs, and supply chains,” KPMG highlights. This pressure is pushing sellers to enhance their ESG efforts.

Globally, 57% of survey respondents expect to include ESG due diligence in most transactions over the next two years. However, there is a call for clearer evaluation criteria, especially in fast-moving deals. Some investors seek advisors to quantify intangible ESG factors, such as reputation risks and long-term environmental impacts.

“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.” said Craig Mennie, Global Head of Transaction Services for KPMG Australia

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

The 2024 KPMG ESG Due Diligence Study explores the growing importance of Environmental, Social, and Governance (ESG) factors in mergers and acquisitions (M&A). The study highlights how integrating ESG considerations can enhance value creation and mitigate risks, providing a comprehensive guide for investors and dealmakers

1. Increased Adoption: ESG due diligence (DD) is becoming a standard practice, with 43% of US investors planning to conduct ESG DD in the majority of their future deals, up from 33% in the past two years. This shift is driven by a heightened focus on sustainability and regulatory requirements
2. Value Creation: Investors recognize the financial benefits of ESG DD. Companies with strong ESG credentials enjoy price premiums, and 63% of investors are willing to pay more for targets aligned with their sustainability priorities. ESG DD helps uncover opportunities for value creation and enhances post-deal integration
3. Risk Mitigation: ESG DD is critical for identifying and managing risks. Material sustainability findings can lead to deal cancellations, price reductions, and highlight potential operational, legal, and reputational risks. This proactive approach ensures better preparedness and resilience against adverse effects
4. Regional Differences: There is a significant variance in ESG DD adoption between regions. For instance, 82% of investors in Europe, the Middle East, and Africa integrate ESG into their M&A agenda, compared to 74% in the US. This regional disparity indicates varying levels of regulatory pressure and stakeholder expectations
5. Challenges: Common challenges in ESG DD include a lack of robust data, inadequate understanding of sustainability issues, and difficulties in defining the scope of ESG assessments. Addressing these challenges requires a clear strategy, collaboration with external experts, and continuous improvement of due diligence processes

Practical Recommendations:

1. Develop a Clear Strategy: Define your ESG objectives and integrate them into your overall business strategy. This alignment ensures that ESG considerations are systematically included in all stages of the investment cycle.
2. Secure Resources: Allocate appropriate resources and assign responsibilities to ensure thorough and effective ESG DD. This includes training and developing expertise within the team.
3. Collaborate with Experts: Engage external experts to enhance the quality of ESG assessments and provide insights into best practices and emerging trends.
4. Post-Deal Integration: Use ESG DD findings to inform post-deal integration plans, ensuring that sustainability considerations are embedded in operational strategies and practices.
5. Continuous Improvement: Regularly review and update ESG DD processes to incorporate new regulations, stakeholder expectations, and industry best practices.

The KPMG ESG Due Diligence Study 2024 underscores the critical role of ESG factors in M&A. By adopting robust ESG DD practices, investors can unlock value, mitigate risks, and align their investments with broader sustainability goals. This comprehensive approach not only enhances financial performance but also contributes to long-term resilience and growth

Related Article: KPMG Report: Integrating ESG into Corporate Governance through Strategic Board-Level Responsibility

Read the full report here.