The ESG Dealbreaker in Mergers and Acquisitions
In recent years ESG has become a serious factor in mergers and acquisitions. Most buyers and investors now recognise that environmental, social and governance issues influence long term value. Yet one challenge continues to cause friction in almost every deal. The availability and quality of ESG data is often the deciding factor in whether ESG can be properly assessed at all.
When the underlying data is incomplete or unreliable, due diligence becomes uncertain. It can lead to mispricing, overlooked risks or, in some cases, deals that fall apart entirely. Many organisations simply do not have the systems or processes in place to track ESG data in a consistent way. Smaller companies in particular often lack the frameworks required for structured reporting, while larger organisations still struggle with the practical question of what to measure and how to compare it.
That difficulty is understandable. ESG covers a broad range of topics and combines both qualitative and quantitative elements. Carbon emissions, workplace culture, governance structures, cybersecurity and supply chain integrity all fall under the same umbrella. Bringing this variety together in a way that supports a valuation or risk assessment can be challenging.
But challenging does not mean impossible. The companies that handle ESG most effectively are the ones that treat it as part of their value strategy instead of a last minute compliance box. With the right structure, ESG insights can guide better decisions and highlight opportunities that might otherwise be overlooked. The steps below offer a practical way to integrate ESG data into the M&A process.
1. Focus on what truly matters
Not every ESG theme is relevant for every deal. The first step is to determine which topics are material for the target company and its sector. An industrial firm may need to focus on emissions and resource use, while a service based business may need to prioritise governance or social factors. Once the material topics are clear, the data requirements become much easier to define.
2. Understand the current data landscape
The second step is to examine what information is already available. How is the data collected, how reliable is it and does it follow recognised reporting frameworks such as GRI or TCFD. If certain data points are missing, sector benchmarks or reasonable assumptions can sometimes help, as long as any uncertainty is made clear. This will remain important until CSRD reporting becomes more widely adopted.
3. Carry out a full ESG due diligence
A thorough ESG due diligence looks both inside and outside the company. Externally it considers market dynamics, regulatory developments and expectations from customers, employees and regulators. Internally it reviews policies, governance structures, current performance, compliance efforts and the level of integration in day to day operations. Together these perspectives provide a balanced and realistic picture.
4. Translate ESG findings into valuation
ESG has a direct influence on financial value. Higher investment needs, environmental liabilities, social risks and reputational factors all affect returns. On the other hand, companies with a credible sustainability strategy often achieve stronger valuations. ESG insights therefore need to be included in scenario analyses, valuation models and risk assessments.
5. Reflect ESG in the deal structure
If certain data points are uncertain or not yet available, the deal structure can compensate for that. ESG related warranties, reporting obligations or performance conditions can help manage risk. In some situations earn outs or price adjustments linked to sustainability performance provide a balanced way to capture future development.
After the deal: integration matters
ESG does not stop once the deal is signed. The real test is how well progress is monitored and integrated afterwards. This includes ongoing reporting, clear KPIs and regular reviews. Aligning incentives with sustainability performance can help ensure that ESG ambitions translate into real progress rather than high level promises.
“Imperfect data does not have to stop a deal”
Although the lack of consistent ESG data remains a major challenge, it does not need to prevent a transaction from moving forward. With a structured approach and a clear view of what matters most, companies can transform ESG complexity into valuable insight. ESG data may not always be perfect, but it has become too important to ignore.
