As deal activity rebounds across global markets, environmental, social, and governance (ESG) factors are no longer a peripheral concern during mergers and acquisitions (M&A). Entrepreneurs and founders preparing for growth events, whether through acquisition or exit, are now expected to meet the same due diligence standards traditionally reserved for listed corporations.
A recent Deloitte survey found that over 70% of companies have walked away from acquisitions due to ESG concerns, and 72% now formally integrate ESG into the valuation process. These are not just red flags; they are potential deal-breakers.
In this context, ESG due diligence becomes a critical lens through which risk, compliance, and opportunity are assessed. It helps acquirers and investors uncover hidden liabilities, governance gaps, and reputational risks before financial terms are finalised.
From Reputation to Regulation: Why ESG Due Diligence Now Matters More Than Ever
In the past, ESG review was largely confined to sustainability audits or investor checklists. Today, it is embedded in legal contracts, disclosures, and even financing terms. Increasingly, failure to disclose ESG risks can stall funding rounds, breach covenants, or result in post-deal write-downs.
This shift has been driven in part by global regulatory movements, such as the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), which places legal liability on companies for ESG failures across their value chains. While the regulation is aimed at large firms, mid-market entrepreneurs operating internationally are not immune to these changes, especially when their client base includes EU entities.
More broadly, dealmakers expect transparency. Whether you are preparing for a strategic acquisition, seeking a minority investment, or getting ready to sell your company, ESG risk assessment must now be a formal part of your M&A strategy.
ESG Risk Assessment: Mapping Vulnerabilities Before the Term Sheet
ESG risk assessment is more than a legal or compliance step. It is a strategic process that helps both buyers and sellers identify weaknesses that could affect valuation, legal viability, or operational integrity post-integration.
For sellers, this means documenting sustainability metrics, labour policies, carbon reporting, and governance frameworks with the same precision applied to financial data. Neglecting this not only increases due diligence risk but can also diminish deal confidence.
For buyers, ESG due diligence offers an early view into whether a target firm may be misrepresenting its credentials, falling short on environmental obligations, or carrying under-reported liabilities. These insights inform pricing discussions, acquisition structures, and risk buffers.
Entrepreneurs in fast-growing sectors such as fintech or clean energy should be especially vigilant. These industries face heightened scrutiny from institutional investors, who increasingly expect ESG to be embedded from day one.
Fair Value Accounting: Translating ESG Risk into Financial Models
Once ESG vulnerabilities are identified, they must be translated into financial terms through robust fair value accounting. This is where finance leads, and external accountants play a critical role.
Under IFRS 13, fair value is defined as the price that would be received in a transaction between market participants. However, ESG factors such as regulatory non-compliance, poor sustainability metrics, or reputational damage can distort market perceptions and affect asset pricing.
Accountants must assess how ESG risks influence revenue forecasts, asset impairments, or contingent liabilities. Even discount rates may need to be revisited if ESG exposure affects the firm’s overall risk profile. Failing to adjust for these elements could lead to overvalued transactions or post-deal challenges.
To support this process, INAA has partnered with Dealfox, a corporate finance intelligence platform designed to modernise due diligence processes. The partnership gives INAA member firms access to specialist tools for ESG risk modelling, financial benchmarking, and transaction screening.
Click here to learn more about our partnership with Dealfox.
Working with INAA Member Firms to Strengthen ESG Positioning
The M&A market is evolving rapidly, with ESG concerns now woven into the financial and legal architecture of deals. For entrepreneurs and early-stage investors, a comprehensive approach to ESG due diligence and ESG risk assessment is becoming essential.
By working with an international accounting association, businesses benefit from globally aligned expertise, local market understanding, and access to the latest tools and insights. INAA member firms are equipped to help clients prepare for due diligence, ensure transparency in valuation, and build credible ESG narratives that support long-term growth.
If you are planning a sale, acquisition, or partnership and want to ensure your ESG performance is investment-ready, connect with an INAA member firm today.