Extra focus on ESG and commercial due diligence in 2024

According to 44 percent of participants in the annual Dutch M&A Trend Survey by M&A and Ansarada, ESG due diligence – in addition to the usual financial and legal due diligence – will receive more attention in the coming year.

In addition to ESG due diligence (DD), commercial due diligence will also receive a lot of attention, because “after two years of Covid-19 and one year of war in Ukraine and the energy crisis, trend information is no longer available,” says Maurits Duynstee, Partner at AXECO Corporate Finance . “So it is important to focus on commercial due diligence and in particular whether current trading is in line with the budget/business plan.”

Also regularly mentioned in the research are human capital, cyber security, software & ICT and operational due diligence. But ESG DD is clearly in pole position.

ESG is rapidly developing as a research area
It is no surprise that ESG is most often mentioned as an additional focus point. Of the 247 respondents to the online survey, 92 percent indicated that ESG factors will become more important in acquisition processes in the coming year. It is therefore logical that more attention is paid to this in DD studies.

Which area of due diligence will become more important in the coming months:

“ESG is increasingly seen as a separate part of the DD,” says Rianne Roozeboom, Vice President at CFI Group. “Especially to make a baseline measurement of a company’s ESG performance, so that it is later possible to determine whether improvements have been achieved during the investment period. This is also because various investors include this in their strategy. The metrics for ESG are not always clear, and often depend on the sector or type of company.”

Given the increasing ESG risks, it is not surprising that M&A lawyers are increasingly receiving questions about ESG in acquisition processes. “That also has an influence on the legal profession,” says Ytzen Marseille of legal firm JB Law, “just like the rise of privacy legislation at the time. Previously, M&A lawyers did this themselves during a deal, but now you have specialists for that. In that respect, ESG law is increasingly becoming a mature specialism.”

ESG due diligence: risk management and value creation
“We hardly saw ESG before and now we see it more and more,” says Daphne Bens, Head of the Corporate group at DLA Piper Amsterdam. “Corporates already have it more in their DNA, but private equity parties are also increasingly focused on it. I think that it is still often focused on legislation and regulations, and that for value creation, parties are currently more likely to look at human capital and commercial due diligence.”

Indeed, some dealmakers often see the risk management perspective with the ESG DD. For example, Sergio Herrera, Managing Director M&A at Rabobank, says: “We see in our transactions that private equity and infrastructure parties actively conduct ESG due diligence and do not want to run reputational risks.”

Marco Gulpers, Head of Corporate Finance M&A at ING Netherlands, on the other hand, sees that there is increasing attention to the opportunities that ESG can provide. “By integrating sustainability into their operations, customers can achieve enormous competitive advantages. ESG is increasingly part of the entire value proposition of a transaction.”

Investing in the next phase of growth
According to private equity investors such as Ida Kuijken (Fortino Capital) and Richard Reis (Argos Wityu), the emphasis will mainly be on the coherent commercial and operational due diligence as well as human capital DD. “In my role as a Growth PE investor, the commercial DD is very important,” says Kuijken. “What does the market look like, what is the competition doing, what does the end customer want, what problem do we solve and how do we address it per customer group? These things are becoming more important now that you are looking more at forward-looking indicators for organic growth.”

Reis sees operational DD as a top priority for private equity in the coming year. This is in line with his answer to the earlier question about priorities of companies in difficult times. According to the investor, these are: manage your portfolio, increase profitability, and optimize the business. “I think operational due diligence is critical. The other DD areas mentioned are already important, but I think operational DD will receive more emphasis over the next twelve months. My second choice would be human capital.”

Operational due diligence is also very important for Kuijken in the coming year. “Growth is – especially in these times – about execution power. There is now less room to make mistakes. I also think human capital due diligence is important. In growth equity you always invest in a founder and a team, where you look at what the team needs for the next phase of growth.”

Johan Verlinden, Head of Legal & M&A at Fagron, also goes for operational due diligence. “You want to tackle rising costs through greater efficiency, for example in terms of energy consumption. This is also where ESG comes into play. Human capital is also part of this. What is the quality of the people on board and how do you keep them on board?”

Mark Stoelinga, Associate Director at Clearwater International, also emphasizes the importance of operational due diligence in the current climate. “I recently saw an Ansarada statistic that showed the average deal takes longer and we notice that ourselves. We see this especially in the area of operational due diligence. We notice that buyers really want to look a little deeper under the hood with the questions: ‘can you make all this happen, is everything going well now, is there not only a good business plan, but are things also operationally in order?’ IT and software DD are also discussed, because everything is becoming increasingly digital.”

Stoelinga also predicts the emergence of a new form of DD: “We also see more AI due diligence. I recently attended a masterclass about this. There it was not about developments such as ChatGPT, but the focus was mainly on what kind of machine learning models have been implemented and what kind of data driven/big data models are being used. This will also increasingly become a topic within transactions with the growing use of AI within companies.”