Private Equity Leads Corporate Deal Teams on ESG in M&A

NEW YORK, March 15, 2023 — Private equity investors (PEI) could be early leaders when it comes to environmental, social and governance (ESG) efforts in M&A, according to a new Deloitte poll. Based on the data, PEIs lead their corporate M&A counterparts by factors of two and three when it comes to the use of ESG clauses in deal contracts and routine ESG due diligence.

While many respondents evaluate ESG during pre-deal due diligence (PEI = 49.6%; corporate = 43.2%), PEI respondents are nearly three times as likely to approach ESG due diligence “consistently and formally” (26.8%) compared to corporate M&A professionals (9.3%). ESG evaluations could become more widespread as additional professionals from both groups indicate that their organizations plan to incorporate ESG into due diligence processes in the next 12 months (PEI = 23.2%; corporate = 32.6%).

“Across the board, there is growing recognition that ESG due diligence can provide investors with meaningful insights prior to a transaction,” said Brian Lightle, a Deloitte Risk & Financial Advisory partner specializing in M&A, Deloitte & Touche LLP. “Pre-deal ESG diligence can span many categories, ranging from a target company’s ability to comply with current and proposed regulations to existing voluntary green efforts around climate, sustainable supply chain, workforce conditions and energy usage. So, it’s easy to see a future where ESG considerations can have a meaningful impact on many M&A transactions.”

When it comes to inclusion of ESG clauses in M&A contracts, approximately one quarter (26.5%) of the PEIs surveyed include material adverse change clauses, warranties and interim operating agreements, versus 14.1% of their corporate counterparts. Looking to the year ahead, a considerable group of polled dealmakers say their organizations plan to begin using ESG clauses in deal contracts (PEI = 16.3%; corporate = 22.9%).

“Private equity investors report being more prescriptive in their approaches to ESG during the dealmaking lifecycle, which could be key to their rosy outlook on M&A,” said Tanay Shah, a principal specializing in M&A, Deloitte Consulting LLP. “As scrutiny of ESG programs and practices grows in dealmaking and regulatory regimes worldwide, it’s likely dealmakers will uncover other innovations like ESG clauses in deal contracts that can help bridge the gap between due diligence and risk to keep deals on track — all aiming to create more transparency for investors and value for the broader market.”

About the online poll
Over 330 private equity and corporate M&A professionals were polled during a recent Deloitte webcast, titled “ESG’s evolving role in corporate M&A decisions,” on Dec. 6, 2022. Answer rates differed by question.

About Deloitte
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