ESG Due Diligence In M&A: Why It Matters Now

The short version before we go long

If you buy companies for a living, you already speak fluent valuation, synergies, and quality-of-earnings. Add one more language to the list. ESG due diligence is now a core dialect of dealmaking, and it is moving fast from “nice to have” to “price-critical and sometimes deal-critical.” Surveys of global dealmakers show more than half have cancelled a transaction after material ESG findings, and a similar share have cut purchase prices when diligence surfaced issues.

That is not ideology. It is math, regulation, and reputation colliding with operations. New rules in the EU, evolving disclosure regimes in the US and states like California, and the rise of investor grade climate and human rights expectations are pushing buyers to quantify transition risk, environmental liabilities, supply chain exposure, safety culture, data governance, and more.

Below is a practical guide for M&A professionals. We start with basics, dig into what to test, flag what blocks deals, show where value hides in plain sight, call out blind spots, and close with a few real-world examples where ESG concerns stopped transactions.

Why companies are acquired in the first place

Acquisitions happen for many reasons. You might be buying growth, technology, a market position, a brand, cash flows you can refinance, assets you can sweat harder, or people who know things you do not. Often it is a mix. None of that changes with ESG. What does change is your confidence that the price you are paying reflects what you are actually getting, once you layer in compliance obligations, decarbonization pathways, labor practices, data risks, and the regulatory arc that will shape free cash flow in the years you plan to own the asset. The goal is simple. Buy with eyes open so your investment case survives first contact with reality.

Why due diligence is the grown-up in the room

Diligence is how you avoid paying for earnings you will never see. It is how you keep avoidable surprises out of the day two inbox. Environmental liabilities under statutes like CERCLA can attach to the current owner regardless of who caused the contamination, which is why Phase I environmental site assessments and targeted compliance reviews are standard.

That foundation is necessary, not sufficient. Many environmental and social issues sit outside narrow phase-one scopes, and missing them can swing the economics. Experienced counsel note that diligence findings routinely shape deal structure, escrows, indemnities, representations and warranties, and price.

Why ESG is moving from the margins to center stage

Three forces are doing the heavy lifting.

1. Regulatory momentum. The EU’s Corporate Sustainability Due Diligence Directive is now law and will phase in starting in 2027. It requires in-scope EU and non-EU companies to identify, prevent, and mitigate adverse human rights and environmental impacts in their own operations and value chains, plus maintain Paris-aligned transition plans. This raises the bar for buyers of EU assets and for sellers into EU value chains.

In parallel, the EU’s sustainability reporting rules under the CSRD are biting, adding investor grade reporting and assurance requirements that cascade into diligence scoping for acquirers.

2. Disclosure in big markets even amid volatility. The US SEC’s 2024 climate rule is tied up and, as of March 2025, the SEC voted to cease defending it in court. Even so, litigation outcomes remain pending, and many issuers are preparing for overlapping state and global regimes. Translation for deal teams: disclosure risk has not gone away. It has fragmented.

California, for example, is marching ahead with laws that require large companies doing business in the state to disclose Scope 1 and 2 emissions in 2026 and Scope 3 in 2027, and to publish climate risk reports beginning in 2026. CARB has begun implementation steps and posted a preliminary roster of potentially covered companies.

3. Investor and lender expectations. Global adoption of the ISSB’s IFRS S1 and S2 standards is spreading, giving capital markets a baseline for decision-useful sustainability information. Jurisdictions from Australia and Brazil to Malaysia and Türkiye have finalized approaches or set timetables. That means the data you will be asked for in 2026 or 2027 is increasingly knowable today and therefore diligencable.

Add it up and you get a world where ESG due diligence protects value and helps you price it.

The main ESG topics to test during due diligence

Think of ESG diligence as a coordinated set of workstreams plugged into your financial, legal, commercial, and operational work. The right scope depends on sector and thesis, but across industries the following modules recur.

Environmental and climate

• Legacy contamination and permitting. Confirm current and historical releases, waste management, permit status and transferability, and any pending notices or enforcement. Asset-heavy sectors should go beyond Phase I to test compliance and capital needs, not just recognized conditions.
• Emerging contaminants, especially PFAS. If the target manufactures, uses, or disposes of chemicals, coatings, textiles, food packaging, firefighting foams, or runs plating or semiconductor processes, screen for PFAS risks. Regulations and litigation are accelerating across jurisdictions, and buyers are stepping up PFAS diligence in cross-border deals.
• Climate exposure and transition plans. Quantify Scope 1 and 2 emissions intensity and high-level Scope 3 hotspots. Map price on carbon assumptions, energy mix, physical risk to critical assets, and the capex implied by announced decarbonization goals.
• Water, biodiversity, and local impacts. In mining, food, beverage, and data center assets, water availability and local ecosystem impacts can drive permitting and operating costs. ESG diligence should interface with long-lead permits and community expectations early.

Social and human rights

• Supply chain labor and human rights. Test for exposure to forced labor sanctions regimes, such as the US UFLPA, and for compliance with EU and national supply chain due diligence laws. Map high-risk tiers and the maturity of grievance and remediation processes.
• Health and safety culture. Safety is a leading indicator of operational discipline. Analyze incident rates, near miss reporting, root cause investigations, and corrective action cadence. Buyers repeatedly cite serious OHS issues as the sort of red flag that triggers price renegotiation or exit.
• Community license to operate. Where community opposition can slow or halt operations, test the social performance function and stakeholder mapping, not only formal permits.

Governance, data, and compliance

• Anti-corruption, sanctions, and competition law. Review investigations, whistleblower logs, third-party intermediaries, and high-risk jurisdictions.
• Board composition, internal controls, and reporting. Weak controls and opaque reporting correlate with unpleasant surprises.
• Cybersecurity and data privacy. For data-rich targets, map against relevant standards and regulatory regimes. Consider whether cyber posture is investment grade for your exit route.

Across all modules, remember the mechanics. Diligence outputs should feed reps and warranties, conditions precedent, ringfencing structures, and the integration plan.

The main ESG red flags that block deals

Experienced deal teams see the same categories of deal stoppers again and again.

1. Unbounded environmental liabilities. If legacy contamination or waste liabilities lack credible caps, buyers will often step away, especially where strict liability attaches regardless of fault.
2. Safety culture failures. A pattern of serious incidents without credible systemic fixes can be a showstopper in heavy industry.
3. Supply chain forced labor exposure. Under laws like the UFLPA, shipments can be detained, and reputational risk can outlive mitigation. Buyers increasingly require visibility and remediation pathways as closing conditions.
4. Governance opacity. If financial controls, related party transactions, or reporting quality trigger governance risk, committee members will ask whether you can underwrite the numbers at all.
5. Regulatory cliff edges. Targets that will soon enter scope for EU CSDDD or CSRD, or California climate disclosure, without systems to comply, may need material capex and talent to close the gap. That can reshape price and timing.

Surveys back this up. More than half of M&A practitioners have cancelled deals due to material ESG findings, with many more using findings to negotiate price cuts, indemnities, or additional conditions.

Hidden gems that can add value

ESG diligence is not just about avoiding potholes. It can surface value creation levers that underpin your thesis.

• Decarbonization projects with cash-on-cash returns. Energy efficiency upgrades, electrification, onsite renewables, waste heat recovery, and fleet transitions can throw off attractive IRRs while derisking a transition plan.
• Eligibility for green loans or sustainability-linked bonds. Assets that meet taxonomy or lender criteria can access cheaper capital, which rolls directly into valuation math.
• Supply chain resilience as a sales story. Where targets have robust human rights due diligence, they become stickier suppliers to in-scope EU customers who must manage their own chain of activities under CSDDD.
• Seller-prepared ESG packs. Well prepared sellers increasingly provide ESG factbooks, baseline emissions, safety metrics, and third party validations. Buyers report this often translates into faster diligence and fewer valuation haircuts.

Things seasoned teams still overlook

Everyone thinks of permits and spills. Fewer teams pressure test the following.

• Scope 3 hotspot math. Even if current rules do not force you to disclose every category, customers and lenders might.
• PFAS outside the obvious sectors. Beyond fire training sites and coatings, PFAS can surface in textiles, packaging, food contact materials, metal finishing, and even biosolids applied to land near facilities.
• Seller’s climate and human rights readiness for EU and state regimes. If you are underwriting a multi-year hold, assume your portfolio will face CSDDD-style due diligence and CSRD-style reporting from 2027 onward in Europe, and specific climate disclosures in California beginning 2026.
• The politics of ESG language. In some markets, the acronym is polarizing. The underlying issues are not. Many US companies are quietly rebranding while continuing the work because investor and lender requirements, plus state and global laws, still drive the need.

Examples where ESG concerns stopped the transaction

You asked for real world cases. Here are several that made it into the public domain, along with the category of risk that proved decisive.

1. Peabody terminates a multibillion dollar coal acquisition after a mine ignition event. In August 2025, Peabody walked away from its planned acquisition of Anglo American’s steelmaking coal assets, citing a material adverse change linked to a March underground ignition at the Moranbah North mine.
2. AGL Energy abandons a high profile demerger amid climate and governance pressure. In May 2022, Australia’s largest emitter shelved a proposed split into a coal-heavy generator and a retail business after significant shareholder opposition argued the plan would slow decarbonization and destroy value.
3. Market wide data on cancellations. Multiple surveys of M&A professionals have found that material ESG diligence findings have stopped deals in their tracks. More than half of respondents cancelled a deal after ESG findings, and many reduced price.

If you are thinking “that is coal and utilities,” fair point. Those are the publicized cases. The same pattern quietly plays out in consumer goods over supply chain labor risks, in chemicals over PFAS liabilities, and in tech where new data center footprints collide with water and energy constraints.

A practical ESG diligence field guide for deal teams

Here is a short, usable checklist you can hand to the workstream leads. Adjust for sector and size.

1. Scoping and materiality. Before requests fly, align on what could be financially material to the investment case within your hold period.
2. Data requests and management interviews. Ask for environmental permits, enforcement notices, site assessments, safety logs, supplier codes and audits, grievance logs, cyber policies, prior ESG reports, and any climate targets or plans.
3. Site and supply chain sampling. Do not stop at the dataroom. Where material, run targeted site visits and supplier verification.
4. Quantify remediation and compliance capex. Translate findings into cash needs, including environmental remediation reserves, safety upgrades, energy retrofits, or supplier remediation programs.
5. Map disclosure implications. If you will fall under CSRD or ISSB based rules in the hold period, make sure the target can generate investor grade data.
6. Integration plan. Bake in the ESG actions you will need to deliver your thesis.

Sector spotlights

Industrial and manufacturing. Go deep on historical contamination, air and water permits, hazardous waste, asbestos and PCBs, and any change-of-control implications. For plating, semiconductor, textiles, or packaging, run a PFAS screen.

Consumer and retail. Supply chain human rights and product stewardship dominate. Map tier 1 and selected tier 2 suppliers, confirm third party social audits are credible, and test corrective action programs.

Energy and resources. Permit transferability, community impacts, and closure or rehabilitation liabilities are critical. Safety culture is a price lever. ESG risk often determines the cost of capital.

Data centers and tech. Energy and water intensity, renewable procurement, waste heat use, and local community acceptance increasingly shape operating costs and speed to build.

A note on the alphabet soup

You do not need to love acronyms to perform good diligence. What you do need is clarity on the frameworks that affect valuation and exit. If the buyer at exit will be EU listed, think CSRD and ESRS. If the buyer will be a global investor base tapping capital markets, think ISSB’s S1 and S2 as the disclosure grammar. If the asset sells into California, think SB 253 and SB 261. Even with the SEC climate rule in limbo, many issuers will still produce climate disclosures for customers, states, or global investors.

Pulling it together

ESG diligence is not a moral overlay. It is a financial clarity tool. It helps you answer simple questions. Will cash flows show up as modeled. Will you need to spend more than you thought to operate legally and competitively. Will customers and lenders still be there when you need them. Will a regulator or plaintiff reroute your exit. Surveys say buyers who treat ESG as a standard workstream protect significant value and sometimes unlock more.

If you remember nothing else, remember this.

• Scope your ESG diligence to what can move your model.
• Quantify, do not generalize.
• Use findings to shape price, terms, and integration.
• And please, make the ESG lead a first class citizen in the deal room, not the person who gets invited when there are muffins left.

Questions to take back to your Monday pipeline meeting

1. Which live deals face concrete regulatory milestones under EU CSDDD or California’s climate laws within our planned hold period, and have we priced the compliance build.
2. Where are we exposed to PFAS or other emerging contaminants, and what would it cost to ringfence or remediate under plausible scenarios.
3. Which targets could qualify for green or sustainability-linked financing post close if we fund specific decarbonization projects, and how does that change WACC and price.
4. Do we have supply chain human rights risks that could trigger customs detentions or customer loss, and what would a credible fix cost and how long would it take.
5. Where does safety performance suggest deeper operational risk than the dataroom implies, and are we underwriting enough to fix it.

Conclusion

M&A is still about buying the right asset at the right price for the right reasons. ESG diligence simply sharpens each of those three words. It tells you whether the asset will keep its license to operate, whether the price fairly reflects remediation, transition, and compliance costs that are now more predictable, and whether your reason to own the asset survives the world as it is becoming. Markets are not patient with surprises. Neither are investment committees. The teams that integrate ESG into their core diligence are finding and fixing issues earlier, negotiating smarter terms, and telling a better equity story at exit.

What have you seen in recent processes. Where did ESG diligence save a deal or sink it. What parts of the work feel like high friction with low yield, and what would make them faster. Add your experiences and we will compare notes on how to do this with less pain and more payoff.