The incorporation of ESG criteria (Environmental, Social and Governance) in the stages of due diligence – thorough investigation and analysis done before mergers, acquisitions, partnerships, or investments – is a relatively recent practice. However, it has been gaining slight momentum in recent years, reflecting the market’s growing concern with non-financial risks that directly impact reputation, sustainability, and long-term value of companies.
ESG due diligence has emerged as an evolution of traditional legal, accounting, labor, tax, and financial due diligence. It is based on the pressures exerted by investors, consumers, and regulatory bodies, who consider environmental, social, and governance factors as essential criteria in risk and opportunity assessment. Thus, the adoption of the practice reflects a paradigm shift: ESG performance is now understood not only as a competitive advantage but as a requirement for the longevity of businesses.
In practice, the process includes assessing whether the company complies with environmental laws and adopts sustainable practices; checking working conditions, diversity, and human rights in the supply chain; and analyzing governance structures, transparency, ethics, and anti-corruption efforts. The goal is to ensure that the business is responsible and resilient, protecting the investor against hidden liabilities.
The first step in conducting ESG due diligence is planning and defining 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 team members responsible for carrying out the work. This team may consist of internal employees and professionals from a specialized consultancy. Subsequently, information must be collected by requesting documents and reports related to environmental policies (licenses, resource use, emissions, waste, environmental risk management, etc.), social aspects (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 engage with company leadership responsible for ESG and risk areas, and if possible, conduct on-site technical visits for verification of 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 improvement opportunities – the detailed report preparation should begin. In addition to all the collected information, recommendations should be suggested, such as possible corrective measures; and contractual clauses or guarantees should be indicated (if it is a corporate transaction).In conclusion, mechanisms can be established to monitor and track the ESG evolution within the company, with possible periodic audits or sustainable KPIs (acronym for Key Performance Indicators or Key Performance Indicators). The entire process contributes to making decisions more informed, assertive, and sustainable, with mitigation of legal, financial, and reputational risks.
