Looking beyond to unlock investment value

No private equity investor wants to discover a multimillion-pound environmental liability after completion. Equally, no deal team wants to spend months negotiating an acquisition, only to find that the business is poorly positioned for changing customer expectations, exposed to fragile supply chains or carrying operational inefficiencies that undermine the investment case.

The first problem is familiar territory for environmental, health and safety (EHS) due diligence. The second requires a broader perspective.

Traditional EHS diligence is essential for identifying environmental liabilities, regulatory non-compliance, permitting issues and health and safety risks. But understanding these issues alone may not provide the full picture of a target’s resilience, strategic fit or potential to create value.

“A business can be compliant today and still be poorly positioned for tomorrow”

That is where ESG (environmental, social and governance) due diligence comes in. It complements traditional EHS diligence by looking beyond immediate liabilities to assess the wider risks, opportunities and strategic considerations that could influence investment performance.

For investors looking to build stronger businesses and maximise returns over the ownership period, this broader appraisal can make a meaningful difference.

EHS due diligence: Essential, but only part of the picture

EHS due diligence has a clear and important purpose: to identify, assess and, where possible, quantify material environmental and health and safety risks associated with an acquisition.

Depending on the target and transaction, this may include:

Environmental contamination and potential remediation costs.
Environmental permits, licences and regulatory compliance.
Capital expenditure required to address environmental or safety deficiencies.
Worker health and safety risks.
Environmental management systems and operational controls.
Potential enforcement action, fines or other liabilities.

This work helps buyers understand potential liabilities, inform transaction negotiations and identify issues that may require contractual protection, further investigation or post-acquisition investment.

It is particularly important for asset-intensive businesses, industrial facilities, manufacturing operations and businesses with potentially significant environmental or safety exposures.

However, EHS diligence is not generally designed to answer every question an investor should ask about the business.

Does its operating model remain competitive as markets and customer requirements evolve? Are its supply chains resilient? Is management equipped to deliver the investment thesis? Could better resource efficiency improve margins? Are there governance weaknesses that could undermine growth or integration?

These are different questions, requiring a broader scope of investigation.

ESG due diligence: Understanding the wider investment proposition

ESG due diligence expands the assessment to consider how environmental, social and governance factors may affect the target’s commercial performance, resilience, reputation and future prospects.

It examines not only whether the business meets relevant requirements today, but also how well it is positioned to respond to changing risks, stakeholder expectations and market conditions.

For a private equity investor or corporate acquirer, the assessment can be particularly valuable in five areas.

1. Protecting the investment thesis

A target may appear attractive on financial and operational grounds but have underlying weaknesses that threaten the investment case.

Examples include divergent customer preferences linked to sustainability requirements, poor labour practices, weak oversight of critical suppliers or governance arrangements that may not support a planned acquisition or rapid expansion.

Identifying these issues before completion can help investors test assumptions, refine valuations, adjust deal terms where appropriate and plan proportionate mitigation.

2. Identifying opportunities to improve performance

Due diligence should not stop at identifying problems. It should also explore where changes could improve business performance.

ESG opportunities may include reducing energy and water consumption, improving material efficiency, reducing waste, strengthening procurement practices or improving workforce retention and productivity.

Depending on the business, these measures may reduce operating costs, improve resilience or strengthen its competitive position.

The objective is to identify opportunities grounded in the target’s actual operations and investment thesis, rather than produce a generic list of sustainability initiatives.

3. Assessing future resilience

Businesses operate in a changing commercial environment. Climate-related physical risks, the transition to lower-carbon operations, resource and water scarcity, changing regulation, geopolitical disruption and evolving customer requirements can all affect future performance and even determine the target’s ‘licence to operate’.

The relevance and materiality of these factors will vary by sector, geography and business model.

ESG due diligence helps investors identify which issues genuinely matter to the target, assess potential exposure and understand whether management has credible plans to respond.

4. Understanding governance and management capability

A value-creation plan is only as effective as the organisation’s ability to deliver it.

Weak governance, unclear accountability, inadequate controls, poor business ethics or ineffective management of people and suppliers can create risks that extend well beyond environmental compliance.

ESG due diligence can assess the maturity of relevant policies, controls, oversight and management practices, helping investors understand whether the business is aligned with their own ESG investment mandate, and has the foundations needed to support its next stage of growth.

5. Preparing for stakeholders and the eventual exit

Customers, employees, lenders, institutional investors and prospective buyers may scrutinise ESG-related risks and performance, depending on the sector and transaction.

A business with credible data, sound governance and a clear understanding of its material risks may be better positioned to respond to that scrutiny.

Conversely, poor records, unsupported sustainability claims or unresolved supply-chain issues can complicate customer relationships, financing discussions or an eventual sale.

ESG due diligence can help identify gaps early and establish priorities for strengthening the business before exit. It cannot guarantee a valuation premium, but it can help investors understand what may support or undermine the future investment proposition.

EHS vs ESG due diligence: What’s the difference?

The core message here is that the two approaches are complementary, not competing alternatives. EHS diligence concentrates on environmental and health and safety risks, compliance and liabilities. ESG diligence broadens the lens to include strategic, operational, social and governance considerations.

However, the precise scope should always reflect the transaction, sector and investor’s requirements.

The table below presents a generalised comparison between ESG due diligence and EHS due diligence, yet is not a fixed definition of either service.

It is noted that scopes vary by service provider, sector, transaction and agreed terms of reference. Some EHS providers offer broader sustainability services, and some ESG reviews may incorporate detailed EHS work. Dedicated technical assessments may still be required depending on the transaction.

Area of assessment	ESG / sustainability due diligence	Environmental / EHS due diligence
Environmental regulatory compliance	Broader assessment of material ESG-related compliance and governance	Detailed assessment within the agreed EHS scope
Permitting and licensing	Reviews strategic implications or material gaps where relevant	Core area of assessment
Contamination and legacy liabilities	Considers material findings and their wider implications	Core area of assessment
Phase I environmental site assessments	Not typically a substitute for dedicated site assessment	Commonly included where relevant
Worker health and safety	Reviews management approach, performance and wider workforce implications	Detailed assessment of EHS risks and controls
Environmental management	Assesses maturity, effectiveness and strategic alignment	Assesses environmental controls and compliance
Sustainability governance and reporting readiness	Core area of assessment	Not typically a core focus
Broader governance, ethics and anti-bribery controls	Core area of assessment where material	Generally outside a conventional EHS scope
Diversity, equity and inclusion	May be assessed where relevant and material	Not typically a core focus
Climate risks, targets and decarbonisation	Core area of assessment where material	May address specific environmental or regulatory aspects
Biodiversity, nature and resource scarcity	Assesses material dependencies, risks and opportunities	Addresses site-specific or regulatory aspects within scope
Operational efficiency and circularity	Explores performance improvement opportunities	May identify relevant environmental inefficiencies
Human rights and labour standards	Core area of assessment where relevant	Not typically a core focus
Supply-chain and procurement risks	Assesses material ESG risks, resilience and opportunities	Generally outside a conventional EHS scope
Product stewardship and liability	Reviews relevant product, market and lifecycle issues	Addresses applicable environmental and safety aspects within scope
External ESG media and reputation review	May assess material reputational concerns and the credibility of ‘green’ claims	Not typically a core focus
Geopolitical disruption and value-chain exposure	Assesses material business risks and opportunities	Not typically a core focus

From diligence findings to value creation

The real value of ESG due diligence lies not in the length of the report or the number of issues identified. It lies in helping the deal team make better decisions.

A useful assessment connects its findings to the investment case and the actions that follow.

Example finding	Potential commercial implication	Possible investor response
High energy or material consumption	Margin pressure and avoidable operating costs	Assess efficiency investments and savings potential
Exposure to climate-related disruption	Business interruption or increased operating costs	Evaluate resilience measures and capital requirements
Weak supplier oversight	Supply interruption, labour or reputational risks	Prioritise supplier mapping, controls and contingency planning
Inadequate ESG data and reporting	Increased reporting burden or difficulty meeting customer and investor requests	Establish reliable data, ownership and reporting processes
Weak governance or business ethics controls	Compliance, conduct and reputational exposure	Strengthen oversight, policies, controls and accountability
Unsupported environmental product claims	Customer challenge, reputational damage or potential legal exposure	Validate claims and improve evidence and approval processes

These are illustrative examples; their relevance naturally depends on the business and the findings of the assessment.

For private equity, the output should inform the investment decision and, where appropriate, translate into a practical post-acquisition 100-day improvement plan.

For corporate M&A, it can help assess strategic fit, integration requirements, operational synergies and potential exposures across the combined business.

In both cases, findings should be prioritised by materiality, urgency, potential financial impact and the ability of the investor or management team to act.

“The goal is to turn due diligence into decisions, and decisions into measurable improvements”

Should you commission EHS diligence, ESG diligence, or both?

The right answer depends on what you are buying, why you are buying it and what you intend to achieve.

EHS due diligence alone may be appropriate where the mandate is narrowly focused on defined environmental and health and safety liabilities, site conditions, compliance and permitting. This may be particularly relevant for certain asset acquisitions or transactions with a specific technical risk question.

ESG due diligence adds value where the investment thesis depends on growth, operational improvement, supply-chain resilience, strategic positioning, governance improvements or a credible plan for long-term ownership and exit.

Both are often appropriate for acquisitions where investors need to understand immediate EHS liabilities as well as wider commercial risks and opportunities. This is particularly relevant for asset-intensive businesses, complex supply chains, regulated sectors and targets where sustainability-related factors may materially influence future performance.

A short ownership period does not automatically remove the need for ESG assessment. Equally, a long-term investment does not require every possible ESG topic to be examined in equal depth.

The better approach is to tailor the scope to the deal.

Consider the following questions:

What are the key assumptions underpinning the investment thesis?
Which environmental, social or governance factors could materially affect earnings, cash flow or business continuity?
Are there customer, lender, regulatory or other stakeholder requirements that the target must meet?
What operational improvements or strategic opportunities could be realised during ownership?
What information will a future buyer expect to see at exit?

The answers help determine where ESG due diligence can make the greatest contribution and where more detailed technical investigation is warranted.

A tailored approach to ESG due diligence

No two businesses, sectors or transactions are identical. A standard checklist may provide a useful starting point, but it should not dictate the final scope.

Effective ESG due diligence starts with the investment thesis and the questions the deal team needs answered. It then focuses on the material issues, examines the available evidence, challenges assumptions and translates findings into clear commercial implications.

Depending on the transaction, this may include:

Reviewing the target’s ESG strategy, governance and performance.
Assessing material climate, resource, nature and supply-chain exposures.
Examining workforce, human rights, business ethics and other relevant social and governance matters.
Evaluating sustainability data, reporting readiness and the credibility of environmental claims.
Identifying potential operational improvements and strategic opportunities.
Prioritising findings and recommending practical actions for ownership and exit planning.

The result should be more than a compliance checklist or a catalogue of risks. It should give investors a clearer understanding of the business they are buying, the issues that could affect its performance and the opportunities worth pursuing.

Looking beyond compliance? Let’s discuss your next deal

EHS due diligence remains a vital part of acquisition risk management. But where the objective is to understand the full investment proposition, it may not be enough on its own.

Our ESG due diligence services are designed to complement traditional EHS assessments, providing a broader, commercially focused view of material risks, business resilience and opportunities for value creation.

We work with private equity investors and corporate M&A teams to develop a scope that reflects the target, the investment thesis and the decisions that need to be made.

Planning an acquisition or reviewing your due diligence scope?

Let’s discuss the questions you need answered, the risks you need to understand and the opportunities you want to uncover.

ESG Due Diligence: Unlocking Investment Value