ESG Due Diligence: The New Must-Have in M&A
By James Morton
Not so long ago, a mergers and acquisitions (M&A) deal in real estate or infrastructure was judged on a simple list of criteria: financials, physical asset condition, legal risks, and, perhaps, a glance at tenant quality. But times have changed. The ESG revolution—shorthand for environmental, social, and governance—has transformed how deals are struck, scrutinised, and ultimately valued. What was once an afterthought is now a central pillar of pre-acquisition due diligence, on par with financial or legal review.
It’s not just talk. A recent survey found that 93% of private equity firms in Asia and India now integrate ESG checks into pre-acquisition due diligence, with similar patterns emerging in Europe and North America (Entrepreneur, 2024). Across global markets, ESG due diligence has become both a defensive shield against hidden liabilities and a spotlight for discovering unrecognised value.
Why ESG Has Muscled In
The logic behind this shift is straightforward. The climate crisis, rising regulatory demands, and public scrutiny have all conspired to raise the stakes for asset owners. A property with high carbon emissions or looming climate risk isn’t just an ethical concern—it’s a direct financial risk, from insurance premiums to obsolescence. Social issues, too, have become impossible to ignore. Poor labour practices, community opposition, or a weak track record on diversity can spark reputational crises and undermine future cash flows.
For buyers and investors, the world of due diligence has become more nuanced. It’s no longer enough to check the service charges and verify the leases. They are now expected to interrogate a target’s carbon footprint, energy ratings, exposure to flooding or heat stress, and the ESG credentials of both tenants and supply chains. Sites are assessed for their relationship with local communities, whether they support fair wages, and even their track record on diversity and inclusion. In short, ESG factors are being woven into the DNA of modern dealmaking.
What Are ESG Red Flags in M&A?
In practice, ESG due diligence aims to identify both risks and opportunities—sometimes before the target company is even aware of them. Unmitigated flood risk, for example, can sink a deal outright. The same goes for assets with poor energy ratings in markets where minimum standards are tightening, or properties dependent on fossil fuel heating in a world moving towards electrification.
But it’s not just the “E” in ESG that matters. Social and governance issues increasingly make headlines—and cost deals. Companies that fail to monitor supply chain labour standards, or have a track record of health and safety breaches, are at risk of regulatory fines and activist campaigns. A lack of board diversity, weak whistle-blower protections, or allegations of corruption can turn a promising acquisition into a reputational liability overnight.
For infrastructure deals, the stakes can be even higher. Projects with inadequate community consultation or environmental assessment can face years of costly delays. Lenders, too, are asking tougher questions, wary of stranded assets as the world shifts towards net zero.
Where’s the Upside? Uncovering Hidden Value
Yet ESG due diligence isn’t all about avoiding landmines—it’s equally about identifying upside. Many private equity firms now see the real value in spotting “brown-to-green” opportunities. For example, a commercial building with middling energy performance might look risky on the surface, but if the buyer has a plan to invest in insulation, renewables, or smart controls post-acquisition, the asset’s rating—and value—can be rapidly improved.
A site with low community engagement or a tired social narrative may hold untapped potential. By revamping amenities, supporting local hiring, or partnering with non-profits, new owners can turn a neglected asset into a source of social value and local goodwill. Smart investors don’t just steer clear of ESG risks—they actively seek opportunities to create value that the market has overlooked.
The Due Diligence Checklist: Modernised
So what does ESG due diligence look like on the ground? The checklist is growing ever longer. Buyers now commission specialist climate risk assessments, model future carbon liabilities, and interview tenants about their own ESG practices. Physical inspections include not just building fabric but biodiversity audits and checks for hazardous materials. Legal teams pore over compliance records and upcoming regulation. Community impact reports are weighed alongside balance sheets.
Some investors have developed proprietary scoring tools, blending GRESB, BREEAM, or LEED ratings with bespoke metrics for social impact and governance standards. What once required a tick-box approach now demands genuine engagement and, increasingly, digital data platforms that enable rapid, robust comparison across assets and portfolios.
Global Trends and the Future
The shift is global and accelerating. The survey of private equity in Asia and India is just the tip of the iceberg—firms in Europe and North America are pushing ESG diligence to new heights. Regulatory bodies from the EU to the SEC are issuing new disclosure rules, and banks are factoring ESG risk directly into lending terms.
Market leaders know that the cost of ignoring ESG in due diligence is rising fast. Deals have been derailed by revelations of underreported emissions, lawsuits over workplace safety, or sudden reputational storms. On the other hand, those that get ahead—by addressing ESG issues early and transparently—are rewarded with better financing, higher valuations, and stronger stakeholder support.
Conclusion: Not Optional, But Essential
The message for anyone involved in real estate or infrastructure M&A could not be clearer. ESG due diligence has moved from the periphery to the core of dealmaking. It’s as fundamental as financial or legal review, and the winners will be those who treat it not just as a defensive exercise, but as a source of competitive advantage.
As the market continues to evolve, ignoring ESG is not just risky—it’s a risk that no serious buyer or investor can afford to take.
References:
Entrepreneur. (2024). Shifting ESG Due Diligence in PE Deals
Global ESG Benchmark for Real Assets (GRESB). (2024). GRESB Assessments and Scores.
UK Green Building Council. (2024). ESG in Real Estate: Guidance and Case Studies.