Private equity investors are well ahead of their corporate peers in the process of integrating ESG considerations in the M&A dealmaking process, including being 3x more likely to conduct formal ESG due diligence, according to new poll results released by global professional services firm Deloitte.

The survey of over 330 corporate M&A professionals and private equity investors also indicated that both group expect to significantly increase the integration of ESG factors in the M&A process going forward.

The poll found that half of private equity investors and 43% of corporates already conduct some form of ESG evaluation during pre-deal M&A due diligence, private equity investors are more advanced in this area, with 27% reporting that ESG is a “consistent, formalized component of our due diligence process,” compared to less than 10% their corporate peers.

Results from both groups indicated that ESG factors will likely become more prevalent in the M&A due diligence process going forward, with another 23% of private equity investors and 33% of corporates reporting that they plan to incorporate ESG into due diligence within the next 12 months.

Brian Lightle, a Deloitte Risk & Financial Advisory partner specializing in M&A, said:

“Across the board, there is growing recognition that ESG due diligence can provide investors with meaningful insights prior to a transaction. Pre-deal ESG diligence can span many categories, ranging from a target company’s ability to comply with current and proposed regulations to existing voluntary green efforts around climate, sustainable supply chain, workforce conditions and energy usage. So, it’s easy to see a future where ESG considerations can have a meaningful impact on many M&A transactions.”

Similarly, private equity investors were found to be much more proactive in the utilization of ESG clauses in M&A contracts, with 26.5% reporting the inclusion of ESG-related material adverse change clauses, warranties and interim operating agreements, compared to only 14% of corporate M&A professionals.

In this area as well, ESG considerations are expected to become more prevalent, with 16% of private equity investors, and 23% of corporates indicating that they plan to include ESG conditions in M&A contracts in the next 12 months.

Tanay Shah, Deloitte Consulting M&A ESG and Strategy & Diligence Practice Leader, said:

“As scrutiny of ESG programs and practices grows in dealmaking and regulatory regimes worldwide, it’s likely dealmakers will uncover other innovations like ESG clauses in deal contracts that can help bridge the gap between due diligence and risk to keep deals on track — all aiming to create more transparency for investors and value for the broader market.”

Click here to access the poll results.

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