Environmental, Social and Governance (ESG) due diligence is becoming an important part of investment decisions, mergers and acquisitions, lending, supplier management and corporate risk assessment.

Traditional due diligence generally focuses on financial statements, taxation, legal matters, assets, liabilities and commercial performance.

ESG due diligence expands that assessment by asking:

What environmental, social and governance risks exist, how material are they, who is responsible for them, and what could they mean for the future value of the business?

This is particularly important because sustainability-related risks can arise not only from a company’s own operations but throughout its value chain. IFRS S1 requires companies applying the standard to identify sustainability-related risks and opportunities throughout their value chain when those matters could reasonably be expected to affect the company’s prospects.

The OECD’s 2026 Responsible Business Outlook also highlights the importance of risk-based environmental and social due diligence across operations and supply chains, while noting an implementation gap between corporate commitments and actual identification and remediation of adverse impacts.

1. What Is ESG Due Diligence?

ESG due diligence is the systematic process of investigating a company’s environmental, social and governance performance, risks, policies, practices, data and potential liabilities.

It helps investors and management answer questions such as:

Does the company comply with environmental requirements?
Are there unresolved labour or human-rights issues?
Are there governance weaknesses?
Are ESG claims supported by evidence?
Could climate risks affect future operations?
Are suppliers creating material ESG exposure?
Could an ESG issue reduce the value of the business?
Are significant ESG investments required after an acquisition?

The objective is not simply to produce an ESG score.

The objective is to identify, understand, quantify and manage material ESG risks and opportunities.

2. Why ESG Due Diligence Matters

A company may appear financially attractive while carrying significant hidden ESG liabilities.

For example:

A factory may have excellent EBITDA but also have:

Environmental contamination
Pending regulatory action
Unsafe working conditions
Water dependency
Labour disputes
Carbon-intensive assets
Weak governance

These issues can eventually create financial consequences.

Therefore:

Financial Due Diligence + Legal Due Diligence + ESG Due Diligence

provides a more complete picture of business risk.

3. ESG Due Diligence vs Traditional Due Diligence

Traditional due diligence may examine:

Revenue
Profit
Debt
Tax
Contracts
Litigation
Assets
Working capital
Intellectual property

ESG due diligence additionally examines:

Environmental

Emissions
Energy
Water
Waste
Pollution
Climate exposure
Biodiversity
Environmental compliance

Social

Employees
Health and safety
Labour practices
Human rights
Diversity
Communities
Customers
Supply-chain workers

Governance

Board structure
Ethics
Anti-corruption
Internal controls
Whistleblowing
Cybersecurity
Data governance
Executive incentives

4. When Should ESG Due Diligence Be Conducted?

ESG due diligence can be useful in many situations.

Mergers and Acquisitions

Before acquiring a company.

Private Equity

Before investing capital.

Bank Lending

Before providing significant financing.

Supplier Selection

Before onboarding strategic suppliers.

Joint Ventures

Before entering into partnerships.

Strategic Investments

Before purchasing a significant stake.

Business Restructuring

Before changing operating models.

Export Expansion

Before entering markets with stronger sustainability expectations.

5. ESG Due Diligence in M&A

M&A transactions are one of the most important applications.

An acquiring company should understand whether the target has ESG liabilities that could become the buyer’s responsibility after completion.

Potential issues include:

Environmental contamination
Regulatory violations
Employee litigation
Human-rights allegations
Product safety problems
Corruption investigations
Climate-sensitive assets
Unfunded environmental obligations
Supply-chain risks

A transaction may therefore require:

Purchase Price Adjustment + Indemnity + Remediation Plan + Contractual Protection

6. Environmental Due Diligence

Environmental due diligence examines the company’s relationship with the natural environment.

Key areas include:

Air emissions
Water consumption
Waste generation
Hazardous waste
Soil contamination
Groundwater contamination
Energy consumption
GHG emissions
Environmental permits
Resource dependency
Biodiversity
Climate exposure

The scope should be adapted to the industry.

A manufacturing company may require extensive environmental investigation, while a software company may have a very different environmental risk profile.

7. Environmental Compliance Review

A company should determine:

Which environmental laws apply?
Are required permits valid?
Are permits being renewed on time?
Have regulatory notices been received?
Are there unresolved violations?
Are environmental audits conducted?
Are monitoring records maintained?
Are corrective actions documented?

A single unresolved environmental issue can become financially significant during an acquisition.

8. Carbon and GHG Due Diligence

Investors increasingly need to understand a company’s emissions profile.

The review can cover:

Scope 1
Scope 2
Relevant Scope 3
Emission methodology
Emission factors
Historical emissions
Emissions intensity
Reduction targets
Renewable-energy usage

The analysis should go beyond simply asking:

“How much CO₂ does the company emit?”

It should also ask:

“What financial consequences could the company’s emissions profile create?”

9. Climate Risk Due Diligence

Climate risks can affect assets and business models.

Physical Risks

Flood
Cyclone
Heat
Drought
Water stress
Wildfire
Sea-level rise

Transition Risks

Carbon regulation
Technology change
Customer preference
Energy transition
New environmental requirements
Financing changes

IFRS S2 specifically covers climate-related physical and transition risks and opportunities that could reasonably affect an entity’s prospects.

10. Social Due Diligence

Social due diligence examines how a company treats people connected with its business.

Areas include:

Employee rights
Labour conditions
Workplace safety
Wages
Working hours
Employee benefits
Diversity
Inclusion
Training
Human rights
Community relations
Customer safety

A company with high employee turnover or repeated workplace incidents may face operational and financial consequences.

11. Human-Rights Due Diligence

Human-rights issues can arise in:

Direct operations
Contractors
Suppliers
Logistics
Raw-material sourcing
Overseas operations

Potential issues include:

Forced labour
Child labour
Discrimination
Unsafe working conditions
Excessive working hours
Exploitative employment practices

The OECD Guidelines for Multinational Enterprises on Responsible Business Conduct expect companies to conduct due diligence to identify and address adverse impacts on people, the environment and society, including across supply chains.

12. Supply-Chain ESG Due Diligence

A company’s ESG risk may be concentrated outside its own facilities.

For example:

Company → Tier-1 Supplier → Tier-2 Supplier → Raw Material Supplier

The company may have limited direct visibility into the lower tiers.

Important areas include:

Supplier ESG policies
Labour conditions
Environmental performance
Human rights
Safety
Carbon emissions
Water risks
Responsible sourcing
Anti-corruption

The objective should be risk-based rather than simply collecting questionnaires from every supplier.

13. Governance Due Diligence

Governance is an essential part of ESG due diligence.

A review may examine:

Board composition
Board independence
Committee structure
Related-party transactions
Anti-bribery policies
Fraud controls
Whistleblower mechanism
Internal audit
Risk management
Executive remuneration
Tax governance
Cybersecurity oversight

A company with weak governance can have significant ESG risks even when environmental performance appears strong.

14. ESG Policies and Actual Practice

A common mistake is to review policies without checking implementation.

For example, a company may have a:

Human Rights Policy

But due diligence should ask:

Is employee training provided?
Are suppliers required to comply?
Are violations monitored?
Is there a grievance mechanism?
Have complaints occurred?
Were corrective actions taken?

Therefore:

Policy ≠ Performance

The due diligence process must test implementation.

15. ESG Data Due Diligence

ESG information should be tested for:

Accuracy
Completeness
Consistency
Traceability
Reliability
Supporting documentation

Questions should include:

Where did the data originate?
Who prepared it?
Who reviewed it?
What methodology was used?
What assumptions were made?
Is there historical data?
Is the data independently verified?

IFRS S1 emphasises decision-useful and faithfully represented information about material sustainability-related risks and opportunities.

16. ESG Materiality in Due Diligence

Not every ESG issue has the same importance.

Due diligence should prioritise matters that could materially affect:

Revenue
Costs
Assets
Cash flow
Financing
Business continuity
Regulatory compliance
Reputation
Valuation

For example, a minor office recycling issue may be less financially significant than a major water dependency at a manufacturing plant.

Materiality should therefore be assessed in the context of the company’s business model and circumstances.

17. ESG Red Flags

Some issues should immediately attract attention.

Environmental Red Flags

Major regulatory notices
Contaminated land
Expired permits
Significant environmental litigation
High carbon exposure

Social Red Flags

Serious workplace accidents
Child or forced labour allegations
Repeated labour disputes
High employee turnover
Human-rights complaints

Governance Red Flags

Fraud allegations
Bribery investigations
Related-party concerns
Weak internal controls
Board conflicts
Repeated whistleblower complaints

18. ESG Due Diligence Questionnaire

A practical questionnaire can cover:

Environmental

What are the company’s major environmental impacts?
What are Scope 1 and Scope 2 emissions?
Which Scope 3 categories are relevant?
What environmental permits are required?
Are there pending environmental disputes?
What are the company’s major water dependencies?
How is waste managed?

Social

What is employee turnover?
What are the major workplace safety indicators?
Are human-rights policies implemented?
Are suppliers assessed for labour practices?
Are there employee or community grievances?

Governance

How is ESG governed?
What is the Board’s role?
Are anti-bribery controls effective?
How does whistleblowing work?
How are ESG risks integrated into enterprise risk management?

19. ESG Due Diligence in Private Equity

Private-equity investors should consider ESG both before and after investment.

Before Investment

Assess:

ESG risks
Regulatory exposure
Climate exposure
Governance
Supply chain
Potential liabilities

After Investment

Establish:

ESG targets
Governance improvements
KPI monitoring
Management accountability
Reporting systems

This can help investors identify both downside protection and value-creation opportunities.

20. ESG Due Diligence in Lending

Banks and other lenders can consider ESG risks when assessing borrowers.

Questions may include:

Is the borrower exposed to climate risk?
Does it depend on water-intensive operations?
Are environmental liabilities significant?
Does it have governance weaknesses?
Is its business model exposed to transition risk?
Are ESG targets linked to financing?

The objective is to understand whether ESG factors could affect the borrower’s ability to generate cash flow and repay debt.

21. ESG and Valuation

ESG due diligence can influence valuation.

Potential mechanisms include:

Higher Risk → Higher Required Return → Lower Valuation

or:

Operational Efficiency → Lower Cost → Higher Cash Flow → Higher Value

For example:

An inefficient plant may require ₹50 crore of environmental and energy-efficiency investment.

That potential expenditure should be considered in the investment analysis.

22. ESG and Purchase Price

ESG findings may affect the transaction price.

Suppose a target company has an estimated ₹20 crore environmental remediation liability.

The buyer may consider:

Reducing the purchase price
Seeking an indemnity
Creating an escrow
Requiring remediation before closing
Including specific warranties

ESG due diligence can therefore directly affect transaction economics.

23. ESG Representations and Warranties

M&A agreements may include provisions relating to:

Environmental compliance
Labour matters
Human rights
Anti-corruption
Data privacy
Regulatory compliance
Sustainability claims

Due diligence findings can help determine which representations require particular attention.

Legal advisers should determine the appropriate contractual wording.

24. ESG Due Diligence and Greenwashing

Investors should not rely solely on a company’s sustainability marketing.

Claims such as:

“Green”
“Sustainable”
“Carbon neutral”
“Eco-friendly”
“Responsible”
“Net zero”

should be supported by:

Defined boundaries
Methodology
Data
Evidence
Targets
Appropriate documentation

Due diligence should test whether the company’s public claims match actual performance.

25. ESG Due Diligence and ESG Ratings

ESG ratings can provide useful external information, but they should not replace independent due diligence.

A rating may not fully reveal:

Site-specific risks
Pending litigation
Supplier issues
Local environmental conditions
Emerging regulatory exposure
Unreported incidents

Therefore:

ESG Rating + Company Data + Interviews + Documents + Independent Verification

can provide a stronger assessment.

26. ESG Interviews

Documents alone may not provide the complete picture.

Due diligence teams can interview:

CFO
CEO
Sustainability head
HR head
Procurement head
Compliance officer
Plant head
Legal team
Internal audit
Major suppliers

Interviews can help identify practical issues that may not appear in formal reports.

27. Site Visits

For asset-heavy businesses, site visits can be particularly valuable.

A site visit can examine:

Waste storage
Water management
Safety practices
Energy systems
Pollution controls
Worker facilities
Emergency systems
Environmental conditions

This can help validate information obtained through documents.

28. ESG Due Diligence Process

A practical process can follow ten steps:

Step 1 – Define Scope

Determine the transaction, investment or business decision.

Step 2 – Understand the Business

Study operations, assets, geography and value chain.

Step 3 – Identify Material ESG Risks

Determine the most relevant E, S and G issues.

Step 4 – Collect Data

Obtain policies, records, reports and evidence.

Step 5 – Conduct Interviews

Speak with key management and operational personnel.

Step 6 – Perform Site Assessment

Where appropriate, inspect relevant locations.

Step 7 – Assess Risk

Score probability, impact and financial exposure.

Step 8 – Identify Remediation

Determine what needs to be corrected.

Step 9 – Quantify Financial Impact

Estimate potential costs and benefits.

Step 10 – Report Findings

Present key risks, opportunities and recommended actions.

29. ESG Due Diligence Report

A professional report can contain:

Executive Summary

Major findings and critical issues.

Business Overview

Operations and value chain.

Environmental Findings

Environmental risks and compliance.

Social Findings

Workforce, safety and human rights.

Governance Findings

Board, ethics and controls.

Financial Impact

Potential costs and exposures.

Risk Rating

Low, medium, high or critical.

Recommendations

Immediate and long-term actions.

Transaction Implications

Potential impact on valuation, terms or conditions.

30. ESG Risk Scoring

A simple scoring model can be used:

ESG Risk Score = Probability × Impact × Exposure

For example:

Probability = 4
Impact = 5
Exposure = 3

Illustrative score:

4 × 5 × 3 = 60

The scoring system should be customised to the organisation and should not be treated as a universal ESG methodology.

31. ESG Due Diligence for MSMEs

MSMEs may not have dedicated sustainability teams.

A practical MSME assessment can focus on:

Environment

Energy
Water
Waste
Pollution
Basic emissions

Social

Employee safety
Labour compliance
Wages
Training
Grievances

Governance

Basic internal controls
Ethics
Anti-bribery
Tax compliance
Data security

The objective is to establish a proportionate and practical system rather than replicate a large multinational’s process.

32. ESG Due Diligence for Indian Exporters

Indian exporters increasingly need to understand sustainability requirements in overseas markets and customer supply chains.

They should monitor:

Product sustainability requirements
Carbon information requests
Supply-chain due diligence
Labour standards
Environmental compliance
Customer ESG questionnaires
Traceability requirements

An exporter should therefore consider ESG readiness as part of international market strategy.

33. Role of CFO in ESG Due Diligence

The CFO can help evaluate:

Financial exposure
Remediation costs
Capex requirements
Cash-flow impact
Financing consequences
Valuation implications
Insurance
Risk provisions

The CFO’s role is especially important in translating ESG findings into financial consequences.

34. Role of CA Professionals

Chartered Accountants can contribute to ESG due diligence through:

Financial analysis
Internal controls
Compliance review
ESG reporting
Risk assessment
M&A due diligence
Data validation
Governance review
Assurance readiness

The CA can help connect ESG findings with financial statements and transaction economics.

35. Role of CMA Professionals

CMAs can add significant value through:

Cost impact analysis
Carbon costing
Life-cycle costing
Resource efficiency
Capex evaluation
Scenario analysis
Budgeting
Cost-benefit analysis
Operational performance analysis

For example:

ESG Risk → Expected Cost → Mitigation Investment → Savings → Financial Return

is particularly suited to management accounting analysis.

36. ESG Due Diligence and Internal Audit

Internal audit can independently evaluate:

ESG controls
Data quality
Compliance
Supplier controls
ESG policies
Risk-management processes

This can identify weaknesses before they become material problems.

37. ESG Due Diligence and Technology

Technology can make due diligence more efficient.

Companies can use:

ESG data platforms
ERP systems
Supplier portals
Data analytics
AI-assisted document review
Risk dashboards
Geographic risk tools

However, technology does not eliminate the need for professional judgement.

Poor source data can still produce poor conclusions.

Therefore:

Technology + Reliable Data + Professional Judgement

is the stronger combination.

38. ESG Due Diligence and Nature-Related Risk

Nature-related risks are becoming an increasingly important area.

Examples include:

Water dependency
Biodiversity impacts
Deforestation
Soil degradation
Ecosystem dependency
Natural-resource scarcity

The ISSB already requires material sustainability-related risks and opportunities, including nature-related matters, to be considered under IFRS S1 when they could affect an entity’s prospects. In October 2026, the ISSB also opened consultation on proposed nature-related disclosure guidance.

This means nature-related due diligence is likely to become increasingly relevant for businesses with significant dependencies on natural resources.

39. ESG Due Diligence and Stakeholder Engagement

Due diligence should not rely exclusively on management statements.

Relevant stakeholders may include:

Employees
Local communities
Customers
Suppliers
Regulators
Investors
Civil-society organisations

Stakeholder engagement can help identify issues that internal company reporting may not reveal.

The OECD’s 2026 guidance emphasises meaningful stakeholder engagement and remediation as important components of responsible-business due diligence.

40. Remediation: The Often-Ignored Part of Due Diligence

Finding a problem is only the beginning.

Suppose due diligence identifies unsafe working conditions.

The company should consider:

Identify → Stop Harm → Correct → Remediate → Monitor

Similarly, an environmental issue may require:

Containment
Cleanup
Regulatory reporting
Restoration
Monitoring

Effective due diligence therefore focuses on outcomes rather than merely producing a checklist.

41. ESG Due Diligence Checklist

Before completing an investment or acquisition, ask:

Environmental

☐ Environmental permits reviewed
☐ Major environmental liabilities identified
☐ Emissions reviewed
☐ Water dependency assessed
☐ Waste management assessed
☐ Climate exposure assessed
☐ Environmental litigation reviewed

Social

☐ Employee data reviewed
☐ Safety performance assessed
☐ Labour issues reviewed
☐ Human-rights risks assessed
☐ Supplier workforce risks reviewed
☐ Community concerns considered

Governance

☐ Board structure reviewed
☐ Anti-bribery controls assessed
☐ Whistleblower system reviewed
☐ Related-party transactions examined
☐ Internal controls reviewed
☐ Cyber/data governance assessed

Financial

☐ Potential remediation cost estimated
☐ ESG-related capex estimated
☐ Revenue exposure assessed
☐ Insurance implications reviewed
☐ Financing implications considered
☐ Valuation impact assessed

42. Ten Questions Every Investor Should Ask

What are the company’s three most significant ESG risks?
Which ESG risks could affect cash flows?
What environmental liabilities exist?
What climate risks affect key assets?
Are there significant social or labour issues?
What governance weaknesses exist?
What ESG risks exist in the supply chain?
Are sustainability claims supported by evidence?
What investment is required to address ESG risks?
What ESG opportunities could increase the company’s value?

43. Ten Questions Management Should Ask Before an Acquisition

Could the target have undisclosed environmental liabilities?
Are any important permits missing or expiring?
Are there material climate-sensitive assets?
Are employees or communities involved in unresolved disputes?
Are suppliers creating human-rights risks?
Is the target exposed to major transition risks?
Are ESG data and claims reliable?
Are governance controls adequate?
What remediation investment will be required?
How should the ESG findings affect the transaction structure?

44. ESG Due Diligence: Value Creation, Not Just Risk Avoidance

ESG due diligence should not focus only on finding problems.

It can also identify opportunities.

For example:

Energy inefficiency → Energy savings

Waste → Recovered materials

Poor supplier management → Supply-chain resilience

Weak governance → Better controls

High employee turnover → Productivity opportunity

Climate exposure → Resilience investment

The best due-diligence process therefore identifies:

Risk + Cost + Opportunity + Value Creation

45. ESG Due Diligence Maturity Model

Level 1 – Basic

Only compliance checks.

Level 2 – Risk-Based

Major ESG risks identified.

Level 3 – Integrated

ESG incorporated into enterprise risk management.

Level 4 – Financially Integrated

ESG risks linked with valuation, cash flow and capital allocation.

Level 5 – Strategic

ESG due diligence actively identifies opportunities and supports long-term value creation.

Companies should aim to move from checklist-based due diligence to decision-useful due diligence.

46. Common ESG Due Diligence Mistakes

Mistake 1: Treating ESG as a checklist

A checklist alone does not reveal business impact.

Mistake 2: Looking only at direct operations

Value-chain risks can be significant.

Mistake 3: Accepting management claims without evidence

Documentation should be tested.

Mistake 4: Ignoring financial impact

ESG findings should be connected with business consequences.

Mistake 5: Focusing only on environmental issues

Social and governance risks can be equally important.

Mistake 6: Ignoring remediation

A risk assessment should lead to corrective action.

Mistake 7: Relying entirely on ESG ratings

External ratings are inputs, not substitutes for professional investigation.

47. A 90-Day ESG Due-Diligence Programme

For organisations developing a repeatable process:

Days 1–30

Develop ESG questionnaire
Define materiality criteria
Identify industry-specific risks
Establish document requirements
Create risk-scoring methodology

Days 31–60

Conduct pilot due diligence
Review suppliers
Test ESG data
Conduct management interviews
Identify financial impacts

Days 61–90

Finalise ESG due-diligence framework
Integrate findings with investment decisions
Create management dashboard
Establish remediation process
Train finance and procurement teams

48. The Future of ESG Due Diligence

ESG due diligence is likely to become increasingly connected with:

Climate risk
Nature and biodiversity
Human rights
Supply-chain resilience
Carbon accounting
Sustainable finance
M&A
AI and data analytics
ESG assurance
Regulatory compliance

The direction is moving from:

“Does the company have an ESG policy?”

to:

“What sustainability-related risks and opportunities could affect the company’s future financial performance and value?”

That is closely aligned with the investor-focused approach of IFRS S1.

Conclusion

ESG due diligence is becoming an essential component of modern business and investment analysis.

It helps companies and investors identify environmental, social and governance risks before those risks become expensive surprises.

A strong ESG due-diligence process should connect:

Business Model → ESG Risks → Value Chain → Financial Impact → Risk Mitigation → Value Creation

For investors, it can improve investment decisions.

For companies, it can strengthen resilience and governance.

For lenders, it can improve risk assessment.

For acquirers, it can protect transaction value.

For MSMEs, it can improve readiness for customers, lenders and global supply chains.

For CAs, ESG due diligence creates opportunities in financial analysis, controls, compliance, assurance and M&A.

For CMAs, it creates opportunities in costing, financial impact assessment, scenario analysis, resource efficiency and value creation.

Ultimately, ESG due diligence should not be viewed as another corporate questionnaire.

It is a structured method of answering one fundamental business question:

“What ESG-related issues could change the future value, resilience and performance of this business—and what should we do about them?”