Shifting ESG Due Diligence in PE Deals In a recent survey, 93 per cent of the respondents integrate ESG in their preacquisition due diligence.
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Traditionally, ESG (Environmental, Social, Governance) due diligence in Private Equity (PE) deals has been viewed narrowly — primarily as a tool for risk mitigation and compliance cost estimation. However, this perspective is rapidly changing. Increasingly, PEs are recognizing ESG due diligence as a critical driver of long-term value creation. In a recent survey, focused on India and South East Asia, by the Singapore Venture & Private Capital Association and Alvarez & Marsal (SVCA A&M ESG Value Creation Survey 2024); 93 percent of the respondents integrate ESG in their pre-acquisition due diligence. They place equal focus on identifying sustainability risk factors and identifying opportunities for long-term ESG value creation.
GLOBAL ESG PRIORITIES VARY BY REGION
While climate change and related transition risk dominate ESG concerns among investors in Europe and North America, the survey interestingly tells a different story in Southeast Asia and India. Social responsibility and labor practices emerge as top concerns in these regions, with climate change ranking slightly lower. This shift is logical: approximately 45 percent of the industries by GDP in Southeast Asia and India are labor-intensive. These industries, such as mining, manufacturing, garments, textiles, and agriculture, are also more prone to noncompliance issues.
IMPLEMENTATION CHALLENGES
While there is a clear intent to link the ESG risk mitigation and value creation plan identified during due diligence to the overall post-acquisition performance improvement plan, implementation can be challenging. This is primarily due to lack of standardized data, lack of expertise, inability to directly link all ESG initiatives to financial outcomes, resistance from the portfolio company and variance between the investment time horizon and the return on investment or ROI horizon as initiatives like decarbonization take longer to yield tangible benefits than the investment time horizon of five-ten years.
BRIDGING THE GAP
To overcome these challenges, PE firms and portfolio companies must adopt a tailored approach. One-sizefits-all strategies don't work. Instead, they should focus on two-three ESG levers most relevant to their industry and business model — alongside operational levers — to drive measurable financial outcomes.
•Measure what matters: Rigorously track ESG KPIs and link them directly or indirectly to financial outcomes.
•Upskill portfolio management teams: Move beyond sustainability awareness towards ESG value measurement and how they can best socialise these benefits as business drivers.
•Integrate teams: When sustainability teams in PEs are integrated into investment teams, portfolio companies generally deliver better implementation outcomes. Combining pre-deal.
ESG diligence with financial and operational diligence reveals the Target's ESG maturity and value creation levers to include in the post-deal performance improvement plan. Agreed value creation levers at the deal stage have a higher chance of successful implementation post-deal. ESG diligence is no longer optional—it's a critical tool for unlocking value in PE deals. Firms that prioritize ESG, integrate it into due diligence, and implement tailored strategies will be better positioned to drive long-term growth, resilience, and returns.
