A recent global survey reveals that Environmental, Social, and Governance (ESG) factors are increasingly influencing Asian dealmaking. Among 600 M&A professionals across 35 regions, 71 percent noted a rise in ESG importance over the last 12 to 18 months. Furthermore, 82 percent now include ESG in their M&A strategies, a notable increase from 74 percent the previous year.
ESG’s Impact on Deal Pricing
The survey also points to an effect on pricing. Dealmakers with more mature ESG due diligence practices were far more willing to pay a premium for high-performing targets. 24 percent of “high maturity” respondents were prepared to pay a premium above 6 percent, compared with just 10 percent of their less experienced peers.
Separately, a global study by Boston Consulting Group (BCG) and Gibson Dunn found that three-quarters of dealmakers had encountered a material ESG finding in a transaction over the past three years. The benefits of catching such issues early are estimated at protecting up to 10 percent of deal value.
Shift from Defensive to Value-Creation
Priscilla Wang, director of corporate and finance at Singapore law firm Drew & Napier, says the figures are consistent with developments across Singapore and the wider region.
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“Today, buyers use ESG to identify ‘green alpha’ – opportunities to create value post-acquisition through decarbonisation, operational efficiencies, and entering sustainable markets.” This broader use of ESG directly affects target valuations. “A target’s ESG maturity could now directly impact its valuation,” Wang states.
Companies with robust ESG frameworks may command a green premium, while lagging targets face a carbon penalty or potential valuation discounts due to perceived transition risks. Wang attributes this shift to “a confluence of tightening regulatory disclosure requirements, investor and lender-driven green financing conditions and heightened reputational risks around greenwashing.”
Expanded Due Diligence and Contractual Terms
The impact of ESG extends across the deal lifecycle. Due diligence, Wang says, “has expanded from basic environmental compliance to a more vigorous data verification.” In sectors where ESG is a particular focus, buyers may now require remediation before closing as a condition precedent, or structure deferred consideration tied to post-closing sustainability milestones.
Contracts increasingly reflect these concerns. “We have also seen more warranties that go beyond the ESG compliance warranties,” Wang says, citing examples such as supply chain soundness and the accuracy of ESG public disclosures, alongside “specific indemnities for potential environmental liabilities” in known risk areas.
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These obligations can affect whether parties proceed with a deal, reprice it, or change its structure. Wang distinguishes between issues that can be addressed after closing and those that materially affect value. “A record-keeping gap can possibly be rehabilitated post-closing,” she says, “while any known risks which have not yet crystallised, such as unmitigated supply chain labour violations or critical infrastructure exposed to severe physical climate risks, could affect value of the transaction and cannot be easily hedged.”
In the latter case, she says, the parties must assess whether the target still has sufficient value to support a pricing negotiation, “or is it a risk significant enough for client to make a call to walk away.”
The Future of ESG in M&A
“Striking this balance requires moving past treating ESG as an absolute barrier to entry and instead treat it as a variable similar to other commercial factors so that it forms part of the overall deal negotiation,” she says.
