ESG risks in M&A are no longer a side issue. Environmental, social and governance factors now drive value, risk and strategic fit.
Deals are no longer judged only on financial performance or strategy. Instead, investors, regulators and consumers increasingly expect alignment with sustainability goals and strong ESG compliance.
The shift is visible across the market. Traditional oil majors are buying clean energy companies, and sale and purchase agreements now carry ESG-specific clauses. ESG shapes everything from asset selection to due diligence. Its financial effect is real too, touching valuations, investor appetite and long-term growth.
Three trends behind the rise of ESG in deals
First, shareholders, lenders and ESG-focused funds increasingly look at how a company operates, not just what it produces.
Second, consumers care. In one survey of 7,500 consumers, 80% said ESG factors influence what they buy.
Third, voluntary commitments are becoming law. The European Union’s Corporate Sustainability Reporting Directive (CSRD) is the most comprehensive ESG reporting mandate so far. In Nigeria, the Climate Change Act 2021 requires organisations to follow carbon budgets set by the Federal Ministries of Environment and National Planning.
How ESG risks in M&A show up in practice
ESG now runs through the whole deal lifecycle. For example, Shell acquired Daystar Power, a hybrid solar provider in West Africa, to strengthen its ESG profile.
The data points the same way. One study of 509 deals found ESG due diligence in a third of transactions and explicit ESG clauses in 45% of agreements. In another survey, 81% of dealmakers said they now give ESG more weight in due diligence. Meanwhile, a 10-point improvement in ESG score has been linked to a 1.8x increase in EV/EBITDA multiples.
What warranties and indemnity insurance does
Warranties and indemnity (W&I) insurance covers losses from breaches of the warranties and indemnities in a sale agreement. Buyers gain reliable recourse, while sellers reduce their residual liability and exit more cleanly.
There are two main forms. Buy-side policies, the more common type, let the buyer claim directly against the insurer. In competitive auctions, sellers often arrange indicative cover and then pass it to the preferred bidder, which makes their bid more attractive.
The benefits are practical. W&I insurance shortens negotiations over liability caps and speeds up deals. However, it has limits. Policies usually exclude risks already identified in due diligence, and premiums of around 1% to 3% of the insured amount can deter smaller transactions.
Using W&I insurance to manage ESG risks
ESG liabilities can derail even a promising deal, whether through legacy contamination, breaches of emissions rules or governance failures. Consequently, insurers have adapted. Policies increasingly include ESG-specific warranties, and demand is growing for affirmative cover of historical environmental risks. Standalone environmental policies can also address liabilities that due diligence uncovers.
This has improved due diligence as well. Insurers now work closely with legal advisers and sustainability consultants to understand each target’s ESG exposure before underwriting.
As ESG scrutiny intensifies, W&I insurance is set to become an essential tool for sustainable deal-making. Our Mergers, Acquisitions and Private Equity 2025 Wrap-Up and our analysis of how the tax reforms affect M&A transactions cover other forces reshaping deals.
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