ESG considerations are increasingly being integrated into the dealmaking process by M&A professionals, according to a new survey by global professional services firm KPMG, which found that over half of respondents reported that they have cancelled deals due to material findings during ESG due diligence, and that nearly two thirds of investors would pay a premium for companies aligned with their ESG priorities.

For the study, KPMG surveyed 200 U.S. ESG practitioners including corporate investors, financial investors, and M&A debt providers.

The survey found that three quarters (74%) of professionals are already integrating ESG considerations as part of their M&A agenda, with the identification of ESG risks and opportunities given as the top reason for conducting ESG due diligence, by 46% of respondents, followed by requirements by investors, cited by 19%, and preparation for regulatory requirements by 14%.

KPMG U.S. ESG and Climate Services Leader Mark Golovcsenko, said:

“The data speaks loud and clear: Companies and investors are increasingly integrating ESG considerations into their M&A strategies, not only because it’s the right and responsible thing to do but also because of the value implications of ESG.”

The survey examined the potential impacts of findings in the ESG due diligence process, with more than half of respondents indicating that red flags on ESG could be a deal stopper (51%) or result in additional closing conditions (52%), and 44% saying it could result in a valuation reduction. 53% of respondents said that material ESG due diligence findings have resulted in deal cancellations, and 42% said that they have resulted in purchase price reductions.

While adverse material findings have impacted or cancelled deals, the study also found that over 60% of investors would be willing to pay a premium for targets that demonstrate high levels of ESG maturity and that align with their own ESG priorities. Of these, more than a third said that the premium amount could exceed 5%.

The study also indicated that the frequency of ESG due diligence is expected to increase going forward. 72% of investors indicated that they will conduct ESG due diligence on more than 20% of deals in the future, compared to 56% who have done so in the past 2 years, including 27% who expect to conduct ESG due diligence on more than 80% of deals, compared to only 16% who have done so over the past 2 years.

The survey also examined the key challenges facing professionals conducting ESG due diligence, with a lack of robust data reported as a top challenge by 59% of respondents. 56% also reported difficulty in selecting a meaningful scope for ESG due diligence, 56% said that there was an inadequate understanding of what ESG due diligence means across stakeholders, and 45% reported difficulties in quantifying their findings.

KPMG U.S. Partner, ESG Clare Lunn said:

“As the world continues to evolve, so do the expectations of businesses. Our latest ESG Due Diligence Survey reveals an undeniable truth: Sustainable practices are no longer just a choice but a prerequisite for resilience and growth.”