ESG plays a larger role in Singapore M&A valuations

This broader use of ESG affects target valuations. “A target’s ESG maturity could now directly impact its valuation,” Wang says. “Companies with robust ESG frameworks may command a green premium, while lagging targets face a carbon penalty or potential valuation discounts due to perceived transition risks.”

She attributes the shift to “a confluence of tightening regulatory disclosure requirements, investor and lender-driven green financing conditions and heightened reputational risks around greenwashing,” which she says has pushed ESG “from a peripheral due diligence item to an important driver of pricing and financing in M&A.”

The impact extends across the deal lifecycle. Due diligence, Wang says, “has expanded from basic environmental compliance to a more vigorous data verification.” In sectors where ESG is a particular focus, buyers may now require remediation before closing as a condition precedent, or structure deferred consideration and earn-outs tied to post-closing sustainability milestones.

Contracts increasingly reflect these concerns. “We have also seen more warranties that go beyond the ESG compliance warranties,” Wang says, citing examples such as supply chain soundness and the accuracy of ESG public disclosures, alongside “specific indemnities for potential environmental liabilities” in known risk areas.

These obligations can affect whether parties proceed with a deal, reprice it or change its structure. Wang distinguishes between issues that can be addressed after closing and those that materially affect value.

“A record-keeping gap can possibly be rehabilitated post-closing,” she says, “while any known risks which have not yet crystallised – such as unmitigated supply chain labour violations or critical infrastructure exposed to severe physical climate risks – could affect value of the transaction and cannot be easily hedged.”

In the latter case, she says, the parties must assess whether the target still has sufficient value to support a pricing negotiation, “or is it a risk significant enough for client to make a call to walk away.”

ESG should be assessed in the same way as other commercial considerations, according to Wang.

“Striking this balance requires moving past treating ESG as an absolute barrier to entry and instead treat it as a variable similar to other commercial factors so that it forms part of the overall deal negotiation,” she says.

Tighter disclosure regimes and greater scrutiny from institutional limited partners (LPs) and sovereign wealth funds are expected to reinforce these trends. Such investors “now treat ESG metrics as a proxy for governance quality and long-term value,” Wang says.

ESG due diligence is also maturing “into a standalone workstream alongside legal, financial and tax review.” She expects this to turn ESG “from a voluntary differentiator to a deal risk factor” and replace “the era of high-level qualitative sustainability policies” with a more quantitative and institutionalised approach.

For businesses and advisers, sustainability data should be treated as more than a compliance requirement. “The businesses that thrive in the coming years will be those that treat sustainability data as a fundamental strategic asset rather than a regulatory burden,” Wang says.

“By taking concrete steps to institutionalise ESG practices today, corporate leaders can protect their deal valuations, accelerate closing timelines and insulate their broader corporate portfolios from long-term transition risks,” she concludes.