ESG DD assessment helps anticipate sustainability risks and identify value creation opportunities
ESG DD complements commercial, legal, and technical due diligence assessments by systematically and proactively evaluating the sustainability of a business or an investment.
ESG DD, or Environmental, Social, and Governance Due Diligence, is a responsibility assessment that examines the performance and maturity level of an investment or a target company in terms of sustainability. ESG due diligence is just as important strategy tool in investments as commercial or technical due diligence.
The ESG DD process helps identify sustainability risks and value creation opportunities that affect business in connection with mergers and acquisitions, industrial investment projects, and other investments. Typically, acquisition and investment decisions focus on commercial aspects, but sustainability-related factors determine whether the investment’s profitability is on a solid, sustainable foundation.
ESG DD integrates sustainability into the investment process
Stakeholder requirements and tightening regulations increasingly require companies to assess the environmental and human rights impacts of investments, as well as themes related to good governance. According to a study by TESI, sustainability is already a part of the mundane for private equity investors: 100% of respondents include sustainability in their investment strategy, and more than half have prepared a sustainability plan for their portfolio.
A Morgan Stanley survey shows that allocations to sustainable investments are growing, as over 80% of institutional investors plan to increase the share of sustainable investments in their portfolios. Sustainability is increasingly a differentiator when selecting an asset manager. Investments that carefully consider ESG factors in advance are more resilient to changes in the operating environment and meet tightening requirements.
However, ESG DD is not just a tool for the investment and finance world. Responsibility assessments benefit all actors who want to anticipate and comprehensively address risks affecting business and factors influencing the sustainability of returns.
ESG DDs evaluate sustainability performance and maturity
ESG DD is equally suitable for assessing the sustainability of a small pilot laboratory or a billion-euro battery factory. The content and scope of the assessments can be tailored to the size and industry of the target entity. How do due diligence assessments typically proceed?
1. Mapping Phase: We identify the most relevant sustainability themes, risks, and opportunities based on the target business and the client’s sustainability goals. We use frameworks such as the EU Taxonomy and Equator Principles (EP).
2. Data Collection: The sustainability assessment may involve extensive data and document reviews, interviews with key personnel, site visits, desktop analyses, or all of the above.
3. Findings and Recommendations: Based on the collected data, we conduct an analysis and provide insights using Sweco’s diverse expertise. If the target does not meet best market practices, buyer values, or objectives, we propose actions to minimize risks.
Companies succeed only if their products and services meet the sustainability expectations of customers and partners and gain a social license to operate. ESG DD provides an objective view of sustainability compliance and strengthens trust, which is critical especially in B2B markets and large industrial investments.
ESG DD supports strategic and long-term value creation
The financial benefits of ESG DDs are reflected in risk mitigation and strategic value creation. ESG DDs are not just a risk-focused checklist. They can reveal new sustainability-driven value creation opportunities, from improving energy efficiency to circular economy innovations and new partnerships. The result is a more sustainable, competitive, and valuable investment in the long term.
ESG DDs can also examine how the transaction aligns with and impacts the buyer’s own sustainability goals and strategy implementation. For example, linking transition plans to the target’s carbon footprint, potential locked-in emissions, and emission reduction measures is essential to ensure committed climate targets can be achieved as planned.
From a risk management perspective, ESG DDs support long-term value creation and prevents significant financial losses: sustainability risks are as tangible as traditional business risks. Climate risks, environmental risks, supply chain vulnerabilities, occupational safety, regulatory risks, or reputational damage can quickly alter an investment’s return potential.
M&A and climate targets
Acquisitions can significantly impact a company’s science-based climate targets (SBTi targets). When evaluating a target company, it is important to determine the scope and coverage of emissions accounting, the company’s climate goals and emissions trends, as well as planned and implemented emission reduction measures.
If the acquired company’s emissions significantly change the buyer’s total emissions (by more than 5%), the baseline year emissions tied to the climate target must be recalculated retroactively to include the acquired company’s emissions. In addition, the target must be updated to continue meeting SBTi criteria.
From the perspective of the company’s climate target, it is important to understand the carbon footprint the acquired company brings and the investment and cost implications of reducing these emissions in the coming years. Will the climate target remain realistic and achievable? What financial impacts will the acquisition have on the target?
ESG DDs help anticipate various risk factors and often also identify ways to increase investment value, for example through resource efficiency or circular economy solutions.
Benefits of ESG DDs:
• Strengthen stakeholder trust
• Anticipate changes in the operating environment and legislation
• Enable sustainability assessment of new technologies
• Reduce (hidden) risks and reputational damage
• Validate investment sustainability in advance
• Increase the value of the investment target
• Improve access to financing
• Prevent greenwashing
• Create added value, growth, and competitive advantage through responsibility
Essi Heikkinen, Manager, Strategic Sustainability Consulting, essi.heikkinen@sweco.fi
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Heini Vassinen, Head of Energy & Advisory, heini.vassinen@sweco.fi