In today’s dynamic investment landscape, the integration of Environmental, Social, and Governance (ESG) factors has become more than just a trend. It is emerging to be strategically imperative alongside other more traditional performance measures such as profitability and financial performance. As a result, we are seeing an emergence of ‘ESG Diligence’ being conducted in M&A transactions.
This is a trend that is becoming increasingly evident in the world of private equity investment. While financial returns remain a primary focus for investors and their funders, the lens has widened to include broader considerations of sustainability, ethics, and long-term value creation. This is a competitive environment, so the ability to measure and report on the ESG impact and performance of portfolio companies has become a key priority to Private Equity organisations.
For the very same reasons, ESG diligence is emerging to be a crucial component of decision-making processes for Private Equity and other investors.
WHAT IS ESG DILIGENCE?
ESG diligence involves evaluating the environmental, social, and governance risks and opportunities associated with an investment or portfolio company. This goes beyond traditional financial analysis to assess how companies manage their impact on the planet, their relationships with stakeholders, and the quality of their corporate governance structures.
An important step further for Private Equity and other investors is an understanding of double-materiality. In other words, a consideration of how environmental and social factors may affect a business, as well as how a business’s activities may impact the environment and society. Double materiality is important for a company to have a clear understanding of how ESG factors in the world affect the financial value of an investment or portfolio company.
