Why and How Supply Chain ESG Considerations Are Increasingly Impacting M&A Processes

CDI Global’s recent experience with M&A transactions worldwide shows that ESG (Environmental, Social, and Governance) criteria are increasingly requested and integrated into target analysis, frequently leading to challenging due diligence processes regarding sustainability and ESG performance of target companies and, in the end, impacting acquisition decisions.

ESG requirements and supply chains

Initially driven by listed companies and investors facing stringent ESG requirements, this focus has gradually extended to non-listed and smaller firms as ESG compliance becomes embedded in corporate ethics. The rise of numerous “green” investment funds, particularly in Europe and the USA, has further reinforced the trend.

There is indeed little doubt that this “ESG move” will thrive and prosper in the coming years, as it is, ultimately, driven by both consumers who expect brands to behave responsibly in their business operations and to uphold sustainability values in their product deliveries, and institutions - that have created over the years an intricate and complex set of regulations that companies must comply with in order to continue their operations.

Quite often, it is the target’s supply chain that bears its most significant environmental and social impacts, making the M&A due diligence process a “moment of truth” as it examines not only the target’s declared commitment to sustainability, as outlined in its reports and strategies, but also the real-world implementation of these practices throughout its supply chain.

Conducting ESG-focused supply chain due diligence

From a practical point of view, specialized auditing firms conduct ESG-focused due diligence on a company's supply chain by following a structured, multi-step process that integrates environmental, social, and governance criteria with traditional risk and compliance assessments. The process typically begins by defining the audit's scope and objectives, which involves identifying relevant ESG metrics and selecting which supplier tiers or operations will be reviewed. Firms then develop an audit plan that outlines responsibilities, timelines, and methodologies, ensuring audit consistency across sites and suppliers.​

Data collection is crucial, combining site visits, interviews, supplier self-assessments, and document reviews to gather information on issues such as emissions, energy use, labor rights, health and safety, anti-corruption, and regulatory compliance. Increasingly, advanced digital tools are used for supply chain mapping, risk scoring, and the analysis of large datasets, enhancing visibility and identifying high-risk suppliers and regions. ESG supply chain due diligence also focuses on traceability, such as tracking raw materials, and may utilize digital risk dashboards and AI-powered analytics to detect compliance gaps, patterns, and emerging risks.​

Once data is analyzed, audit findings are compiled into a report highlighting compliance levels, gaps and discrepancies between theoretical planning and practical application, and, in the end, actionable recommendations. In the context of an M&A due diligence, there is – of course- no room and time for defining, implementing and monitoring progress related to corrective actions, which would be the next step in the normal course of business.

Understanding and assessing gaps between corporate communication and reality

Conducting adequate supply chain due diligence sometimes leads to the conclusion that the target’s world is not as nice as described by their corporate communications, through the identification of gaps between “theory and practice”.

In order to understand why there might be such gaps, let us look at several business issues belonging to supply chain management and control.

1. Lack of Visibility: The length -or cascade of production stages- of upstream global supply chains makes it extremely difficult for companies to monitor working conditions, environmental impact and ethical practices throughout, starting from raw materials requisitions to final product shipment. This is specifically and increasingly difficult for companies that rely on second, third and even higher-tier suppliers across several countries where social responsibility and environmental impact are less regulated, (e.g., South-East Asia and Latin America countries. Notwithstanding the contracting company’s will, visibility and capacity of control decrease with the tier’s rank, often ending with minimum oversight abilities for furthest and often most impactful tiers (raw materials). Therefore, we can see systematic omissions in mapping and reporting second, third or higher-tier suppliers: companies often stop at the transparency of the direct supplier, conveniently ignoring subcontractors who are responsible for unethical practices.

2. Superficial Standards and Audits: many companies rely on third-party certifications and audits (such as BSCI and SMETA for the social programs) that while important often do not capture the reality of daily operations, and are actually implemented “pro forma” with the sole ambition to comply to ESG standards, without actually driving/change/implementing improvements. Even more importantly, audits and certification are fertile ground for corruption or false audits scores.

3. Lack of supplier involvement : sustainability is often imposed from the top down, especially because of institutional regulations that require the company at the head of the supply chain to comply with their own country regulations (example: EU with Asian suppliers). This is seldom translated in financial or technical support for suppliers (especially those in Asian countries) who are showered with demands on carbon emissions data, certifications and social audits, but struggle to actually adopt new practices because they lack resources or adequate background for initiatives.

4. Most of the above issues are actually related to the need to maintain competitive product prices competitive:  this might lead the companies to select suppliers which offer lower costs but do not adhere to high environmental and social standards, therefore creating a need to under-report such activities (“hushing”).

ESG performance and company value

Unsatisfactory conclusions of ESG due diligence analyses may increasingly prove to be deal-breakers, whereas, on the contrary, well-implemented sustainable supply chain management practices (involving traceability technologies, deployment of ESG criteria in supplier selection and monitoring etc.) will often support higher company valuations.

This general conclusion is however to be nuanced based on the industrial sectors and countries involved. CDI Global worldwide presence makes us indeed fully and operationally aware of the uneven deployment of ESG policies within companies throughout the planet and able to support our clients in their approach to such a complex matter, wherever they are or want to be.

Our industry experts have concrete knowledge and understanding which enables them to help clients integrate ESG considerations in their M&A strategies throughout all transaction stages: specific criteria and/or red flags in company search projects, adequate due diligence processes, valuation considerations.

By Luca Barricelli, Thierry Gibert and Gerard Payen

Luca Barricelli is an expert in ESG and sustainable supply chain.

Thierry Gibert and Gerard Payen are CDI Global partners (Paris, France office)