ESG due diligence (Environmental, Social and Governance) is the structured investigation of a target company's ESG practices, risks and opportunities conducted as part of an acquisition or investment process. It has become standard practice for institutional PE funds (signatories of the UN Principles for Responsible Investment) and is increasingly expected in transactions of material size, reflecting growing regulatory requirements (CSRD in Europe from 2024, Swiss Climate Scores, SFDR for fund managers) and LP demands for responsible investment documentation.

The Environmental dimension covers: carbon footprint (Scopes 1, 2 and 3 where available), compliance with environmental regulations, latent environmental liabilities (contaminated sites, hazardous waste), and physical and transition climate risks. The Social dimension includes: working conditions and labor standards, diversity and inclusion policy, social dialogue, and supply chain compliance with labor norms. The Governance dimension covers: board composition and independence, conflicts of interest, anti-corruption controls, data protection (GDPR/Swiss nLPD), and tax transparency.

In Franco-Swiss SMEs and family businesses, ESG due diligence is less standardized than in large-cap deals. It typically focuses on material risks: unprovisioned environmental liabilities (historically common in manufacturing, chemical processing), labor law compliance, and family governance structures. Institutional PE buyers integrate ESG findings into their Value Creation Plan and annual LP reporting — making ESG due diligence a standard input to post-acquisition management.

At Hectelion, we sometime integrate material ESG criteria into our financial due diligences and advise on ESG risk impact on valuation and transaction structuring.