Environmental, Social and Governance ("ESG") considerations are now essential elements in deal-making. Taken together, ESG covers an extraordinarily broad scope, including, but not limited to:

  • Environmental: climate change and greenhouse gas emissions; energy efficiency; resource depletion, including water; hazardous waste; deforestation; and air, land and water pollution and waste management.
  • Social: human rights; working conditions, including slavery and child labour; local and indigenous communities; conflict; health and safety; employee relations; and equality and diversity.
  • Governance: bribery and corruption; tax; transparency; executive pay; political lobbying and donations; shareholder rights; board independence, diversity and structure; and ESG governance framework, including supply chain management and customer engagement.

Although individual elements of the "E", "S" and "G" have been present for decades, organisations are growing more conscious of the dual aims – and increasingly the related legal requirements – of building sustainable businesses and managing exposures to ESG risks.

The COVID-19 pandemic and consequences of climate change have coincided to put in stark relief the importance of a sustainable global economy. Accordingly, the focus of legislators and regulators around the world on ESG considerations, along with related initiatives in the private sector – particularly among institutional investors – have proliferated.

Regulation has grown on multiple fronts, including new affirmative diligence and disclosure requirements. Purchasers in M&A transactions should be mindful of both, as they will be required under the laws of certain jurisdictions to follow mandatory diligence procedures and, in control transactions, to report on the operations of newly acquired businesses.

This chapter focuses on current legal developments and market practice affecting ESG due diligence in M&A transactions. It begins by discussing ESG diligence requirements in selected markets, then highlights certain risk management concerns, addresses benefits for businesses of robust ESG diligence and concludes with a brief consideration of ESG metrics. As this is a limited survey in a rapidly evolving area, there is now, and surely will soon be, other national and super-national legislation that implicates these areas.

ESG: legislative and judicial action

ESG regulations affecting buyers conducting due diligence


  • European Union Corporate Sustainability Due Diligence Directive ("CSDD") Overview. In April 2020, the European Commissioner for Justice, Didier Reynders, announced that the European Commission would commit to introducing rules for mandatory environmental and human rights due diligence.1 This was followed in February 2022, when the Commission published its draft regulation on human rights and environmental due diligence as part of its sustainable corporate governance initiative. This draft CSDD builds on the UN's Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises' Responsible Business Conduct Matters. The CSDD would require companies to identify and, where necessary, prevent, end or mitigate their activities' adverse impacts on human rights and the environment. Companies could be held liable for harms committed at home or abroad by their subsidiaries, contractors and suppliers, and victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.2 EU Member States will be responsible for supervising compliance with these new rules and are required to develop rules on sanctions for non-compliance.3

These requirements will apply to all business relationships in the global supply chain, not just the first tier, which contrasts with Germany's new due diligence law, as noted below.4

Primary objectives. The draft CSDD outlines the following primary objectives: (i) to prevent and mitigate potential or actual adverse impacts on human rights, the environment and good governance in the value chain; (ii) to ensure that companies can be held accountable for such impact; and (iii) to provide anyone who has suffered harm caused by businesses' activities effective remedies in accordance with national law.5

Applicability. The draft directive would apply to: (i) all large EU companies (defined as those with more than 500 employees and a net worldwide annual turnover of over EUR 150 million); (ii) high-risk medium-sized EU companies (defined as those with more than 250 employees and a net worldwide annual turnover of EUR 40 million, where at least 50% of this turnover was generated in a high-risk sector); (iii) non-EU companies that generate at least EUR 150 million in net turnover in the EU; and (iv) non-EU companies that generate at least EUR 40 million in net turnover in the EU, where at least 50% of this turnover was generated in a high-risk sector. High-risk sectors are defined as: (i) the manufacture and wholesale trade of textiles, leather and related products; (ii) agriculture, forestry, fisheries, food manufacturing and wholesale trade of agricultural raw materials, live animals, food and beverages; and (iii) mineral extraction, certain metal manufacturing and wholesale trade of certain mineral resources and products.6

Effects. The draft CSDD will force companies to understand the details and actors within their supply chains, particularly where they may be at risk in the areas of: (i) human rights (e.g., charters and conventions relating to social rights, trade union activities and investment chains); (ii) environment (e.g., the impact on climate change, deforestation, water quality, use of sustainable resources, biodiversity and ecosystems); and (iii) good governance (e.g., bribery, anti-money laundering and tax compliance issues).7


The proposed legislation requires in-scope companies to implement certain human rights and environmental due diligence measures. These include:

  • integrating due diligence into corporate policies and implementing a due diligence policy;
  • identifying actual and potential adverse human rights and environmental impacts arising from the company's operations, or those of its subsidiaries, and from its established business relationships;
  • preventing or, where appropriate, mitigating potential adverse impacts, including implementing prevention action plans, seeking contractual assurances to ensure compliance, investing into management or production processes, providing targeted and proportionate support to enable SMEs to comply and, where relevant, collaborating with other entities to bring the adverse impact to an end;
  • bringing actual adverse impacts to an end or minimising the extent of their impact by taking appropriate measures;
  • establishing a complaints procedure that enables affected persons, trade unions and civil society organisations to submit complaints where they have legitimate concerns about the actual or potential human rights and environmental impacts of the company's operations; and
  • monitoring the effectiveness of identification, prevention, mitigation, ending and minimisation of the adverse impacts by carrying out periodic assessments of the company's operations and measures.

Companies not already in scope of certain other reporting requirements must publish an annual statement on their websites reporting on matters in scope of the CSDD. The specific content of this statement has not yet been set out; however, earlier drafts of the proposal indicate that these statements need to set out the company's due diligence strategy.8 The obligation of regulated financial entities to implement these due diligence measures is limited in two ways. First, regulated financial entities providing a credit, loan or other financial service need only identify actual or potential adverse impacts before providing such services. Second, they are not required to terminate a credit, loan or other financial service in order to prevent a potential adverse impact or bring to an end an actual adverse impact where doing so can reasonably be expected to cause substantial prejudice to the entity to whom that service is being provided.

Civil liability. This proposed legislation is notable because companies will be held liable in accordance with national law for any violations arising out of adverse impacts on human rights, the environment and governance that either they or the subsidiaries under their control have caused or contributed to by acts or omissions. It remains to be seen whether the entire spectrum of stakeholders (as such term is used in the draft directive) will be afforded standing to bring claims under national liability regimes. The current form of the proposed legislation defines stakeholders as: (i) employees of the company or its subsidiaries; and (ii) groups, communities or entities whose rights or interests are or could be affected by the products, services or operations of the company and its subsidiaries.9

Furthermore, the proposed legislation extends a director's duties of care to act in the best interest of the company to encompass the short-, medium- and long-term consequences of their decisions on human rights, climate change and the environment. This follows from the requirement that directors put into place the due diligence measures mentioned above.

The result of such potential liability is that companies and their directors will no longer be able to protect themselves or investors from potential liability by simply performing basic due diligence.10 Consequently, a need to expand ESG-related processes within companies or other investors, including private equity firms, is likely to arise for those with any business relationships with or within the EU in order to address the framework proposed by the EU.11

Areas of consideration. This is a draft of the legislation and is still subject to change. However, certain key principles have been part of the concept since its inception, including the breadth of the law. The Commission still needs to make a judgment as to how to hold companies liable for harm by means of private actions, while at the same time ensuring an acceptable degree of legal certainty. Furthermore, as discussed above, the Commission will

To access the chapter click here

Originally Published by GLI Mergers & Acquisitions 2022

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.