Deloitte research proves it: Green IS good business
Topic: Sustainability
Even though sustainability is still on everybody’s lips, there are clear signs of ESG fatigue in M&A due diligence. A trend that contrasts with new Deloitte research showing that strong sustainability performance lowers the cost of capital. Which is exactly why companies should stay the course – and step it up. ESG already shapes valuations, risk assessments, financing terms, and long-term value.
Over the past few years, ESG due diligence became a near-standard request in transactions. Capital funds and large corporates wanted to know what they were buying into, from supply chain transparency to climate risks. Today, however, I see signs of slowing momentum.
Why? In my experience, there are two drivers. First, some funds only engaged with ESG because regulation told them to. They saw it as a compliance exercise, not a source of business value. Once the regulatory spotlight shifted, their commitment dropped. Second, recent controversies, such as high-profile cases of alleged greenwashing, have fueled skepticism and made certain investors more hesitant.
But stepping back now is risky. And this is not just my opinion; the data proves it.
Evidence that sustainability pays off
Headed by Bryan Dufour, Deloitte Economics has analysed more than 6,000 European non-financial companies. In our new white paper Does Sustainability Pay Off? Insights on EU Taxonomy and the Cost of Capital, we use EU Taxonomy alignment as a proxy for sustainability performance.
The study shows that a ten percentage-point increase in a company’s Taxonomy-aligned revenue is linked to about a 0.1 percentage-point reduction in its weighted average cost of capital (WACC). The effect is particularly strong in capital-intensive sectors such as real estate, construction, mining and infrastructure, where sustainability alignment more clearly translates into lower financing costs.
In other words, companies with stronger alignment tend to access cheaper financing, providing clear evidence that sustainability credentials carry financial rewards. Even during periods when “green investments” faced net outflows, sustainability continued to matter in valuation and capital markets. This challenges the view that ESG is merely a cost and underlines that sustainability is not only a responsibility, but also a source of measurable financial upside.
Why sustainability makes business sense
The financial case for sustainability goes beyond lower capital costs. In the EU, investment products are categorised according to their sustainability profile: Article 6 funds without a sustainability focus, Article 8 funds with some sustainable elements, and Article 9 funds that are fully sustainable. Today, Article 8 and 9 together make up the majority of the market. This means that companies unable to document sustainability credentials effectively cut themselves off from up to 70 percent of available capital. Access to finance alone is a compelling argument for keeping ESG high on the agenda.
Risk mitigation is another. In economic terms, risk translates directly into cost when it materialises. Poor governance or supply chains exposed to floods, extreme weather or other climate-related risks can quickly become business-critical liabilities. On top of that, consumer behaviour is changing. While price remains the dominant factor, there is growing awareness among buyers. In competitive markets, companies that can demonstrate responsibility and care for people and environment increasingly gain an edge.
And there may be an additional, less tangible factor. My own hypothesis, based on years of dialogue with investors, is that companies performing strongly on sustainability often have CEOs who genuinely care about these issues. When leadership commitment is authentic, it tends to spill over into how the business is run, fostering more modern management practices, healthier workplaces and, ultimately, stronger performance. Sustainability, in this sense, becomes both a signal and a driver of good leadership.
Keep ESG at the core
In M&A, my advice to both buyers and sellers is clear: keep ESG at the core of due diligence. This means investors need to look closely at key factors, not only in individual deals but also in how they manage their portfolios as a whole.
In the due diligence phase, ask questions like:
- What share of the target’s revenues and activities qualify under the EU Taxonomy, and how could this influence financing costs and structure?
- How do ESG-related risks (e.g. carbon pricing, supply chain dependencies, regulatory shifts) affect cost of capital, access to sustainable finance, or asset valuation?
- Is the company’s ESG data independently verified, and is it consistent across subsidiaries, geographies, and reporting periods?
- How does the target’s ESG profile compare with sector peers, and could weaker alignment hurt competitiveness in capital markets or procurement?
In the post-transaction phase, ask questions like:
- Is there a costed, time-bound plan to improve sustainability performance, and is it built into the financial model?
- How will ESG reporting and data collection be embedded into finance, risk, and compliance systems, rather than run as a parallel process?
- Are ESG KPIs tied to executive pay, debt covenants, or investor reporting to ensure accountability?
- Can the company realistically access cheaper financing (e.g. green bonds, sustainability-linked loans) based on its ESG profile?
- What mechanisms exist for stress-testing ESG risks (climate scenarios, regulation, supply chain shocks) and providing transparent investor updates?
Answering these questions helps investors identify risks and opportunities tied to EU Taxonomy alignment and ESG performance, enabling more informed decision-making.
