Advancing Commercial Due Diligence: Beyond Core Deliverables to Dynamic ESG Integration

Private equity investors have long relied on CDD to de-risk investments, validate core deal theses, and make more informed transaction decisions–an approach grounded in proven methodologies and well-scoped mandates. However, this intentional scope limitation may inadvertently leave analytical gaps, which are especially highlighted in today’s complex strategic environment characterized by persistent uncertainty, shifting macroeconomic conditions, evolving market behaviors, vulnerable supply chains, and demands for organizational agility. 

When such strategic factors are outside the defined scope, investors find themselves (knowingly or unknowingly) either evaluating incomplete insights or needing additional diligence to address these gaps. A more strategic approach means anticipating what could be missed, not just delivering on what’s asked. Identifying and proactively addressing these potential blind spots has become imperative for sponsors seeking to invest with greater conviction, speed, and agility.

A more dynamic, advisory-driven approach to CDD–one that, for example, incorporates broader strategic issues such as environmental, social, and governance (ESG) factors–addresses these scope limitations. Integrating ESG diligence directly into core CDD workstreams helps eliminate redundancies and provides investors with deeper, more precise, and strategically integrated insights inherently aligned to business objectives. Conversely, treating ESG diligence separately results in duplicated workflows and fragmented analyses, placing unnecessary burdens on investors. 

This article proposes an evolution in how investors and diligence providers conceptualize and execute CDD, using ESG integration as a primary example. It advocates for a strategic, agile, and commercially aligned approach to ESG analysis, distinct from the compliance-centric methods prevalent in regulatory-driven environments. Highlighting the pragmatic advantages of this model, we’ll provide concrete examples of how ESG diligence can be effectively embedded into diligence workflows and connect to value creation.

Core commercial due diligence typically includes two major workstreams: primary and secondary research. 

Primary research  involves direct engagement with stakeholders through structured interviews, providing qualitative insights into customer preferences, competitor strengths, and overall market dynamics. 

Secondary research leverages market reports, competitive benchmarks, and financial analyses to quantify market size, growth potential, and operational resilience. 

Collectively, these research streams help investors build a comprehensive understanding of a target company's market opportunity, competitive positioning, operational effectiveness, and financial health. 

However, approaching these workstreams with fixed or narrowly defined scopes may limit their effectiveness. Important strategic inputs, such as emerging policy shifts or unexpected regulatory changes, could be overlooked if they fall outside predetermined diligence parameters. Without flexibility to dynamically incorporate such developments, investors may miss timely insights. 

Simultaneously, investors increasingly seek expanded diligence approaches. In today's environment, marked by delayed exits, tighter fundraising conditions, and macroeconomic uncertainties, greater emphasis is being placed on identifying actionable value creation levers during the diligence phase. Investors now expect diligence processes to explicitly evaluate potential value creation opportunities such as pricing strategies, cross-selling potential, operational improvements, and market expansion. By embedding value creation analysis into diligence, investors can better assess not only current business viability but also future EBITDA growth potential. 

Strategic ESG considerations naturally intersect with both core and expanded CDD workstreams. For instance, regulatory developments can significantly alter market sizing assumptions, customer diligence often reveals shifts toward sustainability, competitor analysis must account for rivals’ ESG strategies, and operational assessments increasingly need to factor in ESG-related risks like supply chain disruptions due to climate events or resource constraints. 

Currently, ESG diligence often occurs as a standalone, compliance-driven process, emphasizing data collection for reporting over business relevance. Frameworks like SASB, GRI, and industry-led initiatives such as EDCI, reinforce compliance-focused approaches, resulting in detailed yet strategically superficial outputs. This can perpetuate the perception of ESG as merely a “check-the-box” exercise, overlooking critical connections between ESG factors and core business drivers.

Regulatory-driven ESG disclosure requirements such as CSRD in the EU, can compound compliance burdens, focusing heavily on documentation and data collection rather than targeted strategic analysis. Advocates for stringent ESG regulations overlook that extensive disclosure mandates entrench inefficiencies and divert resources away from critical strategic insights. Conversely, environments less constrained by mandatory disclosures afford diligence providers with greater flexibility, allowing ESG analyses to concentrate on factors most relevant to business value and transaction objectives, providing clear strategic advantages. 

Rather than perceiving fewer disclosures as a shortcoming, a less regulated environment should be seen as more strategically beneficial. It empowers investors to align ESG analyses directly with specific investment theses and business goals, moving away from compliance checklists and towards targeted, fit-for-purpose evaluations of ESG factors demonstrably tied to value creation, competitive advantage, and operational enhancements. For example, investors conducting business-oriented ESG diligence can quickly identify and capitalize on new market opportunities, such as shifts toward sustainable products or changing consumer preferences, enabling more agile and informed decision-making. 

In conclusion, integrating ESG analysis into a dynamic, advisory-driven CDD process represents a critical evolution. Integrating ESG factors within flexible diligence frameworks helps ensure analysis remains relevant, actionable, and directly aligned with investor objectives, thereby enhancing strategic clarity and reducing inefficiencies. PE firms that embrace this dynamic advisory approach differentiate themselves, transforming ESG from a compliance obligation into a potent driver of value creation and competitive advantage. 

Contact us to learn more about how Grant Thornton Stax integrates strategic risks and sustainability considerations into our comprehensive diligence approach.