ESG Due Diligence

ESG due diligence reviews a target company for environmental, social, and governance aspects. It examines, for example, how sustainably the company operates, how it treats employees, and how well it is managed and controlled. For many investors, these criteria are now a fixed part of the purchase decision.

The reason is not only conviction but also regulation and financing: funds are subject to European disclosure duties on the sustainability of their strategies, larger companies report under European sustainability reporting requirements, and supply chain obligations reach beyond a company's own boundaries into its suppliers. Banks factor such criteria into credit decisions, sometimes through margin adjustments linked to defined targets. On the environmental side the review covers emissions, energy and resource consumption, waste and contamination. On the social side it looks at working conditions, occupational safety, staff turnover and the supply chain. On governance it examines compliance structures, anti-corruption, data protection and board composition.

Unlike a purely environmental review, this is not only about liability risk but also about future marketability, because customers often require evidence in tenders and because a company without reliable data drops out of consideration for certain buyers. For the seller the reverse applies: documented metrics and functioning processes widen the buyer universe and avoid price reductions. The findings feed into price, warranties and the post-acquisition value creation plan.

The availability of reliable data is essential in practice, because many mid-sized companies do not yet collect the metrics required. The review therefore often begins with the question of what is measured at all and at what quality. The reach along the supply chain also needs clarifying, since requirements are often passed down by large customers to their suppliers and therefore affect smaller companies not themselves subject to reporting duties. Both determine the effort and the outcome of the review.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.