The incorporation of ESG criteria (Environmental, Social and Governance) in the stages of due diligence – in-depth investigation and analysis conducted before completing mergers, acquisitions, partnerships, or investments – is a relatively recent practice. However, it has been gaining ground slightly in recent years, reflecting the market’s growing concern with non-financial risks that directly impact reputation, sustainability, and companies’ long-term value.
The due diligence ESG emerged as an evolution of the traditional due diligence legal, accounting, labor, tax, and financial. It is based on pressures exerted by investors, consumers, and regulatory bodies, who consider environmental, social, and governance factors as essential criteria in assessing risks and opportunities. Thus, the adoption of the practice reflects a paradigm shift: ESG performance has come to be understood not only as a competitive advantage but as a requirement for business perpetuity.
In practice, the process includes assessing whether the company complies with environmental laws and adopts sustainable practices; verifying working conditions, diversity, and human rights in the production chain; and analyzing governance structures, transparency, ethics, and anti-corruption efforts. The goal is to ensure the business is responsible and resilient, protecting the investor against hidden liabilities.
The first step in conducting due diligence ESG is planning and defining the scope. This means identifying the objectives of due diligence; defining relevant ESG criteria according to the sector, region, and size of the company; and establishing who are the members of the team responsible for carrying out the work. This team can be composed of internal employees as well as professionals linked to a specialized consultancy.
Subsequently, information must be collected, requesting documents and reports related to environmental policies (licenses, resource use, emissions, waste, environmental risk management, etc.), social (labor practices, diversity, health, safety, and community relations), and governance (control structure, ethics, compliance, transparency, and anti-corruption). With all this in hand, it is important to talk to the company’s leadership responsible for ESG and risk areas and, if possible, conduct in loco technical visits to verify practices and physical structures.
After assessing compliance with laws and regulations, alignment with international standards (such as GRI, SASB, TCFD, and OECD), and identifying potential risks (low, medium, high) – as well as opportunities for improvement – the preparation of a detailed report should begin. In it, in addition to all the information collected, recommendations should be suggested, such as possible corrective measures; and contractual clauses or guarantees should be indicated (if it is the case of a corporate operation).
To conclude, monitoring and tracking mechanisms for ESG evolution within the company can be established, with possible periodic audits or KPIs (acronym for Key Performance Indicators or Key Performance Indicators) sustainable. The entire process contributes to more informed, assertive, and sustainable decisions, with mitigation of legal, financial, and reputational risks.
