KPMG: M&A uncertainty fails to slow in ESG due diligence

Economic and geopolitical headwinds have failed to slow a rise in ESG due diligence in M&A transactions globally, according to new findings from KPMG International.

The global organisation’s ESG Due Diligence study – now in its third year – reveals the global priority of ESG in transactions has increased in the past twelve to eighteen months, despite M&A markets decelerating in many countries, in the face of higher interest rates.

More than 600 active dealmakers shared their insights with KPMG for the study, providing valuable insight on how some of the prevalent challenges in ESG due diligence are being mitigated by leading investors and advisors.

When the KPMG ESG Due Diligence study was first launched in 2022, there was clear evidence that deal practitioners were facing practical challenges tackling ESG, despite clear evidence of the rising importance of ESG due diligence.

In this year’s global report, 70 percent dealmakers report an increase in the importance of ESG due diligence over the last 12 to 18 months, while 4 out of 5 say broader ESG considerations are now firmly on their M&A agenda – up from 74 percent in 2023. The rise comes despite softer M&A activity and an increasingly politicised debate about ESG in some countries and territories.

Looking ahead, more than half (57%) of dealmakers expect to perform ESG due diligence on most of their transactions over the next two years. Only 6 percent explicitly stated they don’t intend to perform this type of due diligence in the future.

The study also reveals that dealmakers are conducting ESG due diligence primarily because they believe in the monetary value of identifying sustainability-related risks and opportunities early in the deal process. Investors are also motivated by the belief that ESG due diligence helps meet regulatory requirements, as noted by 44% of global respondents. However, there are significant regional difference in this regard. EMEA (57%) and Asia Pacific (APAC) (55%) rank regulation requirements much more prominently than in the Americas region (19%).

Julie Vasadi, report co-author and Partner at KPMG Australia, commented, “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.”

Almost three in four respondents said they perceive ESG due diligence as more important because of changing stakeholder requirements. What this means, however, can vary from business to business. For example, for general partners of private equity funds, the requirements of their limited partners (LPs) play an important role. Additionally, about two in three respondents indicate that ESG due diligence has become more relevant for them after a recent strategy update.

Despite clear evidence of ESG’s rising importance in M&A, there are some concerns about investment. 60 percent of corporate investors and 80 percent of financial investors have set ‘low budgets’ for ESG due diligence – potentially limiting and risking the ability of external advisors to perform the high-quality due diligence needed by an increasing number of dealmakers.

Investors continue to struggle with selecting a meaningful, yet actionable scope, to conduct ESG due diligence with receiving quality data from target companies and quantifying potential findings. Solutions are emerging for greater scope clarity. Data quality can also improve as sellers and sell-side advisors drive value from divestments with higher quality ESG vendor documentation. Synergies are also becoming clearer between ESG due diligence teams and commercial and operations due diligence teams.

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.”

Christophoros Anayiotos, Board Member, Head of Deal Advisory, KPMG in Cyprus, commented, “Cyprus corporates are at initial stages of setting ESG strategies, with regulated entities like banks, moving faster towards this direction. In the absence of such corporate strategies, this is not priority area for investors consider currently. It is expected, however that inevitably in the coming years, the ESG Due Diligence will become increasingly more important in transactions and advisors should be equipped to identify relevant commercial implications, adding value to the deal.”