How to Benchmark Sustainability Performance in M&A
- Brandon Chicotsky
- Apr 4
- 14 min read
Sustainability benchmarking in M&A is now a key step in identifying risks and opportunities that traditional financial analysis often misses. Here's why it matters:
72% of companies have walked away from deals due to ESG concerns.
Buyers are willing to pay 3%-6% premiums for strong ESG performance, while poor performance often leads to discounts.
ESG factors like carbon intensity, workforce diversity, and governance practices can directly impact deal value, financing terms, and long-term profitability.
Benchmarking involves comparing a target company's ESG metrics against industry peers, global standards, and regulatory requirements. This process helps assess risks, guide valuations, and shape post-merger strategies. Tools like MSCI databases and frameworks like ISSB standards make it easier to evaluate ESG data, but gaps in disclosure remain a challenge - especially for private companies.
To make ESG benchmarking effective:
Focus on metrics that impact financial performance (e.g., energy use, emissions, labor standards).
Align ESG goals with business objectives, like expanding green product lines or improving operational efficiency.
Use benchmarking insights to adjust deal terms, such as tying earn-outs to sustainability KPIs or including contractual protections for ESG-related risks.
What Sustainability Benchmarking Means in M&A
Understanding Sustainability Benchmarking
Sustainability benchmarking involves comparing a target company's ESG (Environmental, Social, and Governance) metrics against industry peers, regulatory requirements, and global standards [4][7]. This process is often used during target screening and due diligence to identify companies with strong sustainability practices while flagging those with poor track records. It also helps assess financial risks and potential opportunities tied to ESG factors [1][3].
Key metrics analyzed during benchmarking include areas like carbon intensity, workforce diversity, board independence, and labor standards within supply chains [7]. For example, Lennox's 2023 acquisition of Alabama-based AES was heavily influenced by AES's "AES Reclaim" asset recycling program, which aligned with Lennox's ESG goals [2].
Benchmarking plays a crucial role in pricing climate risks and governance issues, incorporating them into valuation multiples and earn-outs [3]. However, a significant challenge remains: only about 40% of organizations currently have the ability to automatically source sustainability data, leaving many to rely on manual processes [7]. Despite this, benchmarking provides a foundation for more accurate due diligence and smoother integration, highlighting the importance of ESG metrics in M&A strategies.
Why ESG Factors Matter in M&A Deals
Strong performance in ESG metrics isn't just about ethics - it has tangible financial and operational advantages in M&A transactions. Between 2019 and 2023, ESG funds achieved median annual returns of 12.6%, outperforming the 8.6% delivered by traditional funds [7]. Additionally, nearly 80% of investors now factor ESG considerations into their decision-making processes [4], and 62% of respondents in a recent survey cited ethical concerns as a reason for avoiding certain investments [6].
Beyond financial returns, sustainability benchmarking helps reduce regulatory risks and facilitates smoother post-merger transitions. New frameworks like the EU's Corporate Sustainability Reporting Directive (CSRD) and the SEC Climate Disclosure Rules are creating standardized metrics that guide M&A benchmarking efforts [5][7]. Companies with robust governance - such as independent boards and whistleblower protections - tend to integrate more efficiently and avoid reputational damage after a merger [3].
"The financial returns from a deal can be protected or enhanced by careful management of matters such as energy efficiency, physical climate risk, supply chain resilience, waste reduction and carbon emissions" - Nicolas Bourdier, US Deals Sustainability Leader, PwC [1]
Sustainability-focused deals are also reaping rewards in the form of lower financing costs and access to a larger pool of institutional investors [3]. By 2026, assets tied to renewable energy, battery storage, and grid technology are expected to command premium valuations [3]. Similarly, manufacturers with verified labor-rights practices and Scope 3 emissions methodologies are increasingly viewed as safer choices in cross-border acquisitions [3].
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Setting Up Baseline Metrics and Frameworks
Choosing the Right ESG KPIs
The first step in this process is narrowing down a broad range of sustainability topics to focus on those that directly impact the financial performance of your target company. This process, known as materiality filtering, takes into account factors like the company’s industry, location, size, and operational practices [1]. To illustrate, waste-generation metrics are far more relevant to a manufacturing plant than they are to a software company, while energy intensity is critical for data centers but less so for consulting firms.
Industry-specific standards are key to identifying which factors deserve attention. Tools like academic databases and corporate benchmarking platforms help establish typical performance ranges, such as emissions per dollar of revenue or employee turnover rates. These benchmarks allow you to quickly assess whether a target company is ahead of or lagging behind its peers [1]. Regulatory compliance is another essential consideration. Metrics aligned with frameworks like the EU's Corporate Sustainability Reporting Directive or those that qualify for green tax credits can have a direct impact on deal economics [1][2].
Supply chain assessments are now a must, particularly in sectors like apparel and electronics that face intense scrutiny. Examining traceability systems, labor-rights controls, and Scope 3 emissions methodologies helps uncover potential risks that may surface after acquisition [3]. The stakes are high - 72% of corporations walked away from deals in late 2025 and early 2026 due to ESG performance concerns [3], and 54% of private equity general partners have reduced their bids following ESG due diligence [2].
Once these baseline metrics are established, the next step is integrating them with your broader business objectives.
Matching ESG Metrics to Business Goals
After defining your ESG metrics, the goal is to align them with your deal’s value-creation strategy. This ensures that every KPI supports measurable business outcomes. For example, if your acquisition aims to expand into green product lines, revenue metrics tied to sustainable offerings should be a primary focus. On the other hand, if operational efficiency is the goal, then energy and water intensity benchmarks should guide your financial modeling [1]. This approach integrates ESG factors into the core of your business strategy rather than treating them as an isolated checklist.
"The process of creating value from M&A transactions starts well before a purchase agreement is signed." - Nicolas Bourdier, US Deals Sustainability Leader, PwC [1]
Buyers are increasingly incorporating earn-outs linked to sustainability KPIs, tying portions of the purchase price to achieving specific post-close targets like emissions reductions or diversity improvements [3][2]. As previously noted, sustainability performance can significantly affect deal premiums and discounts, making it crucial to align ESG metrics with broader business goals. When data from the target company is incomplete, industry averages can serve as practical estimates to fill gaps and keep valuation models realistic [1].
Comparing Performance Against Industry Peers
Where to Find Peer Benchmarking Data
Once you've set up your baseline metrics, the next step is finding reliable data to compare your target company with similar businesses. For publicly traded companies, this is often straightforward, as annual reports and regulatory filings provide a wealth of information. For private companies, however, the process requires a bit more digging.
Platforms like MSCI Private Company Data Connect are incredibly useful here. As of March 2024, this platform aggregates climate data from around 20,000 private companies [10]. These tools allow you to screen potential targets and benchmark performance across entire portfolios. Additionally, the Integrated Disclosure Project (IDP) template has become a go-to resource for collecting standardized data from private companies, helping to streamline the process and reduce time wasted chasing inconsistent data [10].
Industry-specific tools and frameworks also come into play. For instance, the MSCI Materiality Matrix identifies which sustainability issues carry financial weight in specific industries, ensuring your benchmarking focuses on metrics that genuinely matter [10]. Other resources, like academic databases, corporate benchmarking platforms, and regulatory filings, serve as a treasure trove of industry insights [1]. These sources can help you establish realistic performance benchmarks before you even begin discussions with the target company.
Confidence in evaluating ESG (Environmental, Social, and Governance) performance has surged. In 2024, 91% of M&A leaders expressed high confidence in assessing a target company's ESG profile, marking a 17% increase from 2022 [11]. This confidence stems from better tools and more standardized data collection methods. However, regional differences still exist. ESG considerations weigh more heavily in M&A strategies in Europe and the Middle East (64%) compared to North America (46%) [11], which can influence both the availability of data and the depth of peer comparisons in these regions.
While these tools and frameworks make benchmarking easier, incomplete or inconsistent data remains a persistent challenge.
Dealing with Missing or Inconsistent Data
Even with robust benchmarking tools, gaps and inconsistencies in ESG disclosures are common, particularly in private markets. As Nicolas Bourdier, US Deals Sustainability Leader at PwC, puts it:
"M&A practitioners know due diligence often demands navigating limited data" [1].
To address this, it's essential to adopt practical workarounds that keep your analysis on track without compromising accuracy. One approach is to request raw metrics - like figures on energy use, water consumption, waste production, and greenhouse gas emissions - rather than relying on processed ESG scores [1]. Raw data is less prone to manipulation and easier to validate against industry benchmarks. If the target company can't provide this data, you can use proxies, such as typical waste-generation metrics combined with local waste-disposal fees, to estimate performance [1].
The adoption of International Sustainability Standards Board (ISSB) standards across 36 jurisdictions by June 2025 is helping to reduce inconsistencies in peer data [9]. However, regulatory fragmentation remains a hurdle. Since 2020, over 30 U.S. states have introduced more than 100 anti-ESG bills, creating a patchwork of disclosure requirements that complicates comparisons across regions [9]. As a result, you may need to adapt your benchmarking approach based on the target company's location.
For specific risks like physical climate hazards, specialized modeling can fill in the gaps. By combining climate models with GPS data, you can estimate potential financial impacts - such as repair costs or revenue losses from flooding or extreme heat - even if the target hasn't tracked these risks [1]. Bourdier emphasizes:
"A disciplined estimation of financial figures enables management to make informed decisions, while avoiding the false precision of pinpoint projections" [1].
The aim isn't to achieve perfect accuracy but to create estimates that are reliable enough to guide decision-making effectively.
Measuring Target Performance Against Benchmarks
Reviewing Past ESG Performance
Analyzing a target's ESG (Environmental, Social, and Governance) performance over the past three years reveals patterns, highlights strengths, and uncovers potential red flags [12]. This historical perspective is crucial for determining whether a company’s sustainability efforts are authentic or simply cosmetic changes made to attract buyers.
Start by examining governance structures. For example, reviewing board meeting minutes can reveal how seriously ESG risks are taken [8]. If ESG topics are rarely discussed or treated as a box-checking exercise, it may indicate that sustainability is not a core focus. As Cooley LLP points out:
"A culture that doesn't permit dissent or value the feedback of employees of all levels is at risk of having more hidden issues" [8].
The presence of whistleblower programs and formal grievance mechanisms is another sign of strong governance.
When it comes to social performance, compare the target’s employee retention rates and diversity metrics to industry standards. Lower-than-average retention rates could signal cultural or operational issues. For example, the rise in "#MeToo Representations" in purchase agreements - from 13% to 37% in just one year - shows how workplace culture risks are increasingly scrutinized [8]. These clauses address allegations and settlements related to sexual harassment, reflecting the growing importance of social accountability.
Environmental performance also needs close examination. Assess sustainability initiatives, waste management systems, and carbon baselines. Use intensity ratios - like greenhouse gas emissions per $1 million in revenue or water consumption per employee - to adjust for company size and enable fair comparisons [12]. A higher energy intensity than peers may point to inefficiencies or future liabilities [2].
Additionally, verify controls for labor rights and tracking of Scope 3 emissions. Many companies only report on a fraction of the 15 categories outlined by the GHG Protocol, so it’s critical to understand what’s being tracked - and what’s not [12]. Gaps in reporting or unverified methodologies in high-risk areas could signal compliance risks or even human rights violations [3].
These insights provide a foundation for follow-up actions based on any deviations from benchmarks.
Using Benchmarks to Guide Further Investigation
If a target's metrics fall significantly outside industry norms, further investigation is necessary. For instance, if emissions are unusually high, conduct an environmental review to uncover potential risks like toxic waste liabilities or inefficiencies in operations [2].
Benchmark deviations can also influence deal valuations. A Deloitte survey from September 2025 found that 72% of corporations walked away from potential acquisitions due to concerns over ESG performance [3]. On the flip side, 83% of M&A buyers are willing to pay at least a 3% premium for companies with strong ESG credentials, while 67% would demand a discount of at least 3% for poor performance [2].
When significant gaps are identified, calculate the investment required to bring the target’s practices in line with industry standards. This information directly impacts the purchase price and the budget for post-merger integration [2]. If the target lacks third-party audits or independent verification of ESG claims, insist on validation before finalizing valuations. Self-reported data often lacks the consistency needed for accurate evaluation [3].
Benchmarking also helps prioritize which sustainability improvements will deliver the best returns. Nicolas Bourdier, PwC’s US Deals Sustainability Leader, explains:
"Assigning value to these business issues during the diligence phase helps them determine the right purchase price and build a sound, detailed value-creation plan" [1].
Focus post-acquisition investments on upgrades that offer the quickest payback, such as energy efficiency improvements or enhanced supply chain transparency.
Lastly, include contractual protections to address identified ESG risks. Increasingly, buyers are tying portions of the purchase price to achieving specific ESG goals after the acquisition. These KPI-linked earn-outs ensure accountability and sustained performance post-deal [2][3].
Using Benchmarking Results in Deal Terms
Modifying Deal Terms Based on ESG Findings
Benchmarking results can play a critical role in shaping deal structures, particularly when it comes to premiums and discounts tied to ESG (Environmental, Social, and Governance) performance. These adjustments reflect real financial risks and opportunities linked to sustainability factors.
One way to address valuation gaps and climate-related risks is by structuring earn-outs or securing ESG-linked financing. Instead of setting a fixed purchase price, consider making part of the payment contingent on the target company achieving specific sustainability goals after the acquisition. For example, this could involve reducing environmental impacts or improving supply chain verification standards [2][3]. Additionally, lenders are increasingly incorporating sustainability metrics into their risk assessments. A target with strong ESG benchmarks might qualify for better interest rates or loan terms. On the other hand, if benchmarking reveals issues like facilities in flood-prone areas or outdated energy systems, you should factor in higher insurance costs and future capital expenditures when modeling financing.
Contractual protections are another important tool. Benchmarking findings can guide the inclusion of specific representations and warranties in the purchase agreement. For instance, if the target’s emissions reporting hasn’t been verified by a third party, you might include indemnification clauses to protect against future compliance penalties. Some buyers are even using ESG-related triggers in Material Adverse Effect (MAE) clauses, allowing them to exit the deal if certain sustainability benchmarks aren’t met before closing [3].
Once deal terms are adjusted to reflect ESG findings, the focus shifts to integrating these benchmarks after the acquisition.
Planning for Post-Merger ESG Integration
After the deal closes, it’s crucial to turn benchmarking insights into actionable KPIs for the combined entity. These could include goals like improving resource efficiency, increasing board diversity, or tightening internal controls.
To ensure accountability, tie management incentives directly to these KPIs. Embedding ESG clauses into shareholder agreements can link leadership compensation to achieving sustainability targets [3]. As Leela Julong from the ESG Business Institute explains:
"ESG risks terminate deals; ESG strengths accelerate integration and unlock capital." [3]
Focus on initiatives that deliver quick financial benefits. For instance, if benchmarking reveals that the target’s energy costs are significantly higher than industry averages, prioritizing energy efficiency upgrades early in the integration process can reduce operating expenses while signaling progress to stakeholders and lenders.
Set up board-level systems to track ESG performance alongside traditional metrics like revenue and profit margins. This ensures that sustainability goals are monitored as rigorously as financial outcomes, allowing for timely adjustments if benchmarks aren’t being met [3].
Finally, approach post-close actions with a clear strategy. Use benchmarking data to identify sustainability improvements that offer the greatest risk reduction or revenue potential, and address these first. Whether it’s standardizing governance processes, aligning reporting practices, or upgrading infrastructure to meet climate standards, focusing on high-impact areas early will deliver better results than trying to tackle everything simultaneously. A disciplined, data-driven approach ensures that ESG integration supports both financial and sustainability objectives.
Conclusion
Incorporating sustainability benchmarking into M&A processes not only safeguards value but also reveals opportunities that traditional financial analysis might miss. By aligning ESG factors with your business and financial objectives, you can address critical risks like regulatory penalties, supply chain disruptions, and physical climate challenges - issues that could significantly impact returns long after the deal is finalized.
The numbers speak for themselves: 72% of corporations have abandoned acquisitions over ESG concerns [3], and 83% of buyers are willing to pay a 3% premium for strong ESG credentials [2]. Between 2019 and 2023, ESG funds achieved median annual returns of 12.6%, outpacing the 8.6% returns of traditional funds [7]. These figures underline the financial impact of ESG performance. Companies that integrate sustainability benchmarking into their due diligence processes often enjoy benefits like cheaper financing, smoother post-merger integration, and access to a broader range of investors.
Leading dealmakers are leveraging sustainability benchmarking to identify operational enhancements - such as energy efficiency improvements or waste reduction - that translate into measurable EBITDA growth. Structuring ESG-linked earn-outs and crafting targeted integration plans can amplify deal value even further. As Nicolas Bourdier from PwC points out, effective ESG management not only protects deal returns but also enhances them [1]. These insights underscore the need for a proactive approach to embedding ESG considerations at every stage of the deal.
To build your benchmarking capability, start now. Maintain sector-specific databases, adopt standardized frameworks like SASB or IFRS S1 and S2, and validate target claims through third-party verification. With global disclosure requirements becoming stricter, delays could leave you at a disadvantage. Focus on financial materiality by identifying the sustainability factors that have tangible costs and benefits for your target's industry. This approach will help guide both the purchase price and post-close integration efforts.
Sustaining this strategic focus after the deal closes is equally important. For more expert advice and practical tips on using ESG benchmarks in your M&A strategy, visit God Bless Retirement (https://godblessretirement.com).
FAQs
Which ESG metrics are financially material for my deal?
When it comes to mergers and acquisitions, the most impactful ESG metrics are those that directly influence a company's valuation, risk profile, and regulatory disclosures. These metrics typically fall into three key categories:
Environmental: Factors such as climate-related risks and how efficiently the company manages its resources.
Social: Issues like labor practices, workplace conditions, and the company's impact on local communities.
Governance: Elements including board structure, leadership transparency, and adherence to compliance standards.
As part of the due diligence process, it's essential to evaluate the company's ESG strengths and weaknesses. This helps ensure that strategies align with the goals of the deal while identifying potential risks that could affect the transaction.
How can I benchmark ESG for a private company with limited data?
When assessing ESG (Environmental, Social, and Governance) for private companies with limited information, it's all about making the most of what you have. Start by leveraging frameworks tailored for minimal data availability. These are designed to work with smaller datasets while still providing meaningful insights.
Here’s how you can approach it:
Use publicly available data: Look for information in press releases, company websites, and regulatory filings. These sources often provide a foundation for understanding a company's ESG practices.
Review internal documents: If you have access, dig into policies, procedures, and sustainability reports. Even limited internal records can offer valuable insights.
Incorporate third-party reports: Industry analyses, watchdog reviews, and stakeholder feedback can fill in the gaps.
To ensure accuracy, take a risk-based approach. This means identifying areas where the company might face ESG-related risks and verifying their claims. Cross-reference legal, operational, and financial data streams to spot inconsistencies or signs of greenwashing. This method not only strengthens the credibility of your assessment but also helps uncover any red flags.
How do ESG findings change price, earn-outs, and deal protections?
Incorporating ESG (Environmental, Social, and Governance) factors into mergers and acquisitions isn't just a trend - it's reshaping how deals are valued and structured. A company's ESG performance can directly impact how much it's worth. Strong ESG practices often boost valuation, while poor ones can drag it down.
Earn-outs, which are payments tied to future performance, are increasingly linked to sustainability metrics. This means buyers and sellers are aligning financial incentives with ESG outcomes. Additionally, deal protections like warranties and covenants are being customized to address ESG-related risks. These measures help safeguard buyers from potential liabilities tied to environmental, social, or governance issues.
