31st July 2025
A company’s environmental, social, and governance (ESG) performance is no longer incidental to M&A transactions. For private equity firms and board directors alike, ESG now plays an integral and measurable role in how companies are valued, how deals are structured, and how exits are scrutinised. As regulation and investor expectations evolve, boards that overlook ESG governance risk undermining both valuation and deal certainty.
Historically, ESG considerations were largely confined to listed companies or impact driven investors and focused on risk management, identifying and mitigating environmental liabilities, social controversies and governance missteps. Today, ESG due diligence is a standard feature at all levels of M&A. Buyers increasingly assess whether a target’s ESG credentials, or shortcomings, pose reputational, legal, or financial risks but also recognise the opportunity that ESG considerations can bring to create value. There is a growing preference for sustainable businesses with robust ESG profiles with these facets now inextricably linked to investor confidence and market credibility. Failure to meet these expectations can materially affect a company’s valuation and future growth prospects and buyers and investors are adjusting price and deal terms accordingly.
The regulatory backdrop is also tightening. The Competition and Markets Authority’s Green Claims Code applies to businesses that make environmental claims about their products or services to UK consumers.
This includes businesses selling goods or services, as well as those making claims about processes or their brand as a whole whether that be on packaging, in advertising or in online market places.
The code ensures that environmental claims made by companies are clear, accurate, and substantiated and non-compliance can lead to investigations and penalties. Certain industries are also subject to a higher level of ESG scrutiny. The energy sector must comply with strict climate reporting and compliance obligations under the UK Emissions Trading Scheme and the Financial Conduct Authority introduced its antigreenwashing rule in May 2024, requiring all sustainability related claims to be “fair, clear and not misleading.”
ESG claims made by companies, whether on packaging, in pitch decks or data rooms, will be held to these standards.
Practically speaking, this means that ESG metrics now show up in due diligence checklists, investment agreements, business plans and even earn out structures. ESG KPI’s such as carbon reduction milestones and workforce diversity thresholds are being embedded into transactions, giving buyers the assurance that value creation is credible and sustainable.
For companies, this shift means ESG can no longer just sit within corporate social responsibility reporting. It must be governed at board level, audited, and tied to long term value creation. Boards should be asking; Are we ESG due diligence ready? Can we substantiate our claims? Are we tracking meaningful KPIs? The independent oversight and critical assessment that experienced non-executive directors bring to a board mean they have a vital role to play in this process.
Best practice starts with robust ESG governance. This includes formal oversight, ESG reporting within board packs and management accountability frameworks. ESG data should be substantiated, either internally or via third party audits.
In the exit phase, PE are looking for ESG audit trails that demonstrate progress against targets. A buyer’s diligence process will often interrogate not just ESG policies, but how they’ve been implemented, enforced, and monitored.
For sellers, weak ESG governance will increasingly result in discounted valuations, tougher indemnities, or in extreme cases, aborted deals. For buyers, poor ESG integration post completion can mean reputational damage, regulatory exposure, and value leakage.
ESG has moved from a nice to have to a nonnegotiable and become a proxy for credibility, governance, and long term viability. For boards and investors alike, treating ESG as a compliance tick box is no longer good enough. To secure premium valuations and seamless exits, ESG must be embedded in strategy, operations, and most importantly viewed as a strategic differentiator rather than a compliance burden. M&A has developed an (environmental) and social conscience. Sustainable, responsible investment is the future and so with the right approach there is no reason why the ESG era can’t be one of opportunity for all stakeholders.