ESG due diligence is becoming increasingly important and commonplace in the M&A process, with its link to monetary value as the primary driver, with most M&A dealmakers willing to pay a premium for targets with high ESG maturity, and over half reporting encountering ESG-related deal-stoppers, according to a new survey released by global professional services firm KPMG.

For the report, Global ESG Due Diligence+ Study 2024, KPMG surveyed over 600 active M&A dealmakers in 35 regions across Europe, the Middle East and Africa, Asia Pacific and the Americas.

The survey found that ESG factors are playing a growing role in M&A dealmaking, with 71% of respondents reporting that ESG considerations have increased in importance in transactions over the past 12 to 18 months, compared with only 2% reporting decreased importance, and 82% saying that ESG considerations are on their M&A agenda, up from 74% in a U.S.-focused survey last year.

According to KPMG, the findings of growing ESG importance go counter to initial expectations driven by softer M&A activity – with 2023 deal volumes at a 10-year low – and a political ESG backlash in some geographies, most notably in the U.S. Counterintuitively, Americas-based respondents were the most likely to report that ESG has become more important in transactions, at 76%, compared with only 70% of their peers in other regions.

The increased importance of ESG appears to be reflected in the outcomes and valuations of transactions, according to the survey, with more than half of dealmakers reporting that they have encountered “deal stoppers” in the ESG due diligence process, and over a third reporting that ESG findings led to consequences such as a purchase price reduction, while nearly 60% said that they would be willing to pay a premium for a target that demonstrates a high level of ESG maturity in line with their ESG priorities. Investors describing their ESG due diligence approach as more mature were found to be more willing to pay higher valuations for better ESG performance, with 24% saying they would be willing to pay a premium above 6%, compared to only 10% of their “low maturity” peers.

Similarly, most dealmakers anticipate a growing frequency of ESG due diligence, with 57% saying that they expect to perform ESG due diligence on most of their transactions over the next two years, compared to only 44% who have done so in the past, while only 6% say that they will not conduct ESG due diligence going forward, compared to 19% who have not done so historically.

Examining the key drivers of the pursuit of ESG due diligence, the survey found that respondents most commonly cited, at 58%, the monetary value of identifying sustainability-related risks and opportunities in the dealmaking process, followed by 44% reporting that ESG due diligence is conducted to be able to respond to regulatory requirements, and 36% saying that it is required by corporate policy.

Florian Bornhauser, report co-author and Director at KPMG Switzerland, said:

“It is becoming increasingly clear that considering ESG on transactions primarily means understanding the commercial implications that could have a significant deal value impact.”

The survey also assessed the drivers behind the growing prioritization of ESG due diligence, with 75% of respondents reporting that ESG due diligence has become more important due to changing non-regulatory stakeholder requirements, and 64% saying that it became more important in the dealmaking process following an investment or ESG strategy update.

One of the key findings of the survey were differences between financial and corporate investors, with the former group found to be more deliberately integrating ESG into their M&A decisions. Financial investors were nearly twice as likely, for example, to describe their ESG due diligence approach as market leading or reasonable mature, at 70%, compared with only 40% of their corporate investor peers. Similarly, financial investors were much more likely to report that they look to acquire targets with “ESG transformation” potential, at 61%, compared with 28% of corporate investors, or to look for targets due to superior ESG performance, at 45% compared with 24%.

The study also assessed the key sustainability-related topics that dealmakers felt should be part of the ESG due diligence process, with climate-related factors emerging as the top considerations, including the target’s understanding of its carbon footprint, science-based decarbonization targets and a credible decarbonization plan, at 67%, and understanding of exposure to climate-related risks at 66%. Other key factors included environmental or social product features such as eco-design and circularity, at 63%, and ESG controversy screening and labor practices at 60% each.

Julie Vasadi, report co-author and Partner at KPMG Australia, said:

“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.”

Click here to access the survey.