ESG due diligence for private equity: are PE firms asking the right questions before investing?

Environmental, social and governance (ESG) due diligence is now a core part of many private equity (PE) transactions, helping buyers identify material risks that could affect value, delay a deal or require significant post-deal remediation.

As we explain in our guide to buying a business in the UK, ESG findings can influence pricing and, in some cases, stop a transaction altogether. ESG due diligence helps buyers understand the material risks and opportunities facing the target business. It also assesses the target’s ESG governance and risk management procedures, and its alignment with the buyer’s sustainability agenda.

For private equity firms (and the underlying Limited Partners), effective ESG due diligence depends on asking the right questions at the right point in the deal process, with a clear focus on value, risk and the investment thesis.

Why generic ESG due diligence checklists are not enough

Many businesses can point to ESG policies, commitments or sustainability statements. But in a transaction context, PE firms need to look beyond narrative.

A generic ESG checklist may confirm that policies exist without establishing whether ESG risks are material to the business, data is reliable or management has adequate procedures to protect asset value during the ownership period.

Effective ESG due diligence should be commercial, proportionate and tailored to the target’s sector, size, maturity, operating model and growth strategy. At Saffery, our approach to ESG due diligence focuses on the risks and opportunities most likely to affect value and growth.

For PE firms, this ESG due diligence should connect sustainability considerations to the commercial questions that matter in a transaction, including:

• Could any ESG issue affect valuation or deal terms?
• Could identified risks create future cost or operational disruption?
• Is the company’s ESG data robust enough for investor, lender or future buyer scrutiny?
• Could the target create value through improved performance, reduced costs, portfolio decarbonisation or a stronger exit story?

Three ESG due diligence areas private equity firms should focus on

Our research into PE firms’ ESG expectations shows three recurring areas of focus: materiality, data and governance. PE firms increasingly want evidence that potential portfolio companies understand their ESG risks, can report against relevant KPIs and have clear accountability for ESG matters.

Materiality assessment: which ESG issues matter most?

The starting point is understanding which ESG risks and opportunities are genuinely material to the target. A materiality assessment can identify and prioritise the issues most likely to affect value, resilience, stakeholders and long-term growth.

The most relevant issues will vary. They may include carbon emissions, energy use, supply chain resilience, workforce practices, cyber risk, health and safety, or changing regulation. PE firms should consider these issues in the context of the target’s sector, customers, operations, supply chain, growth plans and investment thesis.

Material risks that emerge late in the deal process can create friction, affect valuation or delay investment. A target that can clearly explain its material ESG risks and how they’re managed may be viewed as more investment-ready.

ESG data: can the business evidence its ESG performance?

PE firms increasingly expect potential portfolio companies to support their ESG claims with credible data. For climate-related matters, for example, this may include greenhouse gas emissions, carbon reduction plans and exposure to physical or transition risks.

Our research also shows that many PE firms require regular ESG reporting from portfolio companies, with some expecting quarterly information on key ESG risks, opportunities and KPIs.

Depending on materiality, relevant data may cover:

• Greenhouse gas emissions and energy use,
• Health and safety, workforce engagement and inclusion,
• Governance and cyber resilience,
• Supply chain risk, and
• Customer or community impact.

In recent work for a potential client, for example, our ESG due diligence questions covered greenhouse gas emissions across Scope 1, 2 and relevant Scope 3, reduction targets, energy use, health and safety indicators, and ESG-related incidents.

Investors also need to understand how the data was collected, who owns it, how often it’s reviewed and whether it can withstand third-party scrutiny.

ESG governance: who is accountable for ESG performance?

Governance can determine whether ESG ambition leads to delivery. Our research found that board-level ownership, KPI tracking and regular reporting are recurring expectations across a number of PE firms.

Investors need to understand where responsibility sits within the target and whether senior management can deliver improvements after completion. Relevant areas may include governance and risk management, supply chain oversight, regulatory readiness and historical ESG performance.

Our team can help identify the ESG issues and questions most relevant to your transaction.

From ESG risk identification to value creation

A well-targeted ESG due diligence process helps PE firms assess which findings are deal-critical, which can be addressed post-completion, and which may support the value creation plan. These findings should also be considered alongside wider transaction matters, including valuation, deal structure and the accounting implications of PE-backed transactions.

Saffery’s approach covers three broad stages: early screening, risk and opportunity due diligence, and sustainability alignment. It helps investors assess the target’s material issues, value creation potential and alignment with their own sustainability ambitions. Our ESG maturity assessment guide outlines how businesses can understand their current position and identify improvements.

Where ESG due diligence identifies a material issue, buyers should consider its potential financial impact. This may include effects on EBITDA and cash flow, additional capital expenditure, changes to working capital requirements or exposure to future liabilities. Quantifying these impacts can help buyers assess whether an ESG finding should influence valuation, sale and purchase agreement (SPA) negotiations, post-completion investment plans or the wider investment case.

In practice, ESG findings may influence:

Pricing and negotiation

Future remediation costs, regulatory exposure, operational investment or reputational risk may need to be reflected in valuation, deal structure or negotiations.

SPA protections

Material ESG issues may inform warranties, indemnities, completion conditions or post-completion obligations.

The 100-day plan

Findings can identify immediate priorities, such as improving carbon data, appointing an ESG lead, reviewing health and safety controls, strengthening cyber resilience or reviewing supply chain exposure.

Value creation planning

Opportunities may include energy efficiency, improved customer positioning, stronger employee engagement, enhanced reporting, innovation in products or services, or better alignment with buyer and lender expectations.

Exit readiness

Stronger data, governance and evidence of progress can support the exit story and give future buyers greater confidence.

Investment committees

In top level discussions where investment decisions are being made, there’s an increasing need for varying degrees of ESG due diligence to be undertaken/completed.

What good ESG due diligence looks like in private equity transactions

Good ESG due diligence should be:

• Commercial: focused on issues that may affect value, growth, resilience or reputation.
• Proportionate: tailored to the size, sector, complexity and maturity of the target.
• Materiality-led: prioritising the issues that matter most to the business and investment thesis.
• Evidence-based: testing whether ESG claims are supported by data, documentation and governance.
• Forward-looking: helping inform the 100-day plan, value creation strategy and eventual exit story.

Together, these principles support sharper questions and better-informed investment decisions.

How Saffery can help

ESG due diligence should form part of the wider transaction process. It can support valuation and negotiations, guide post-deal priorities and strengthen the long-term investment case.

Our Sustainability and ESG team works alongside our Transaction Services specialists, led by Hayley Cox, to deliver commercially focused ESG due diligence tailored to the target and the investor’s objectives.

To discuss the ESG considerations relevant to your transaction, please get in touch.

Download our ESG services brochure