ESG (environmental, social, governance) has become an integral part of legal due diligence in corporate transactions. Current political developments will not change this in the long term because ESG relevance is based not only on the legalisation of sustainability aspects, but also on increased social sensitivity to environmental and social issues. Buyers can no longer afford to ignore or even assume ESG risks. Failure to comply with legal ESG requirements can lead to considerable financial and reputational damage through fines, exclusion from public tenders or damage to image.
Aim of legal ESG due diligence
The aim of ESG due diligence is to identify and assess risks from the past and to determine the investment required to ensure compliance with relevant ESG requirements in the target company in the future. Legal ESG due diligence can never be carried out by an “ESG lawyer” alone. Due to the diversity of the topics involved, the relevant information and documents must be assigned to respective experts in the fields of environmental law, employment law or real estate law, who then review them using their expertise.
Structure of legal ESG due diligence
ESG due diligence is divided into two main areas:
- Hard law: legally binding ESG criteria based on national and European laws.
- Soft law: voluntary standards and market requirements resulting from sustainability certificates, ratings or internal company guidelines.
The specific structure depends on the transaction structure as well as the industry and size of the target company.
Legal ESG criteria (examples of hard law)
Environmental:
- Compliance with environmental laws such as climate, water and forest protection
- Existence of environmental permits
- Product-related obligations such as take-back and labelling obligations
- Reporting obligations such as EU emissions trading, CBAM, Energy Efficiency Act
- Legality of sustainability claims (green claims)
- Obligations under the Building Energy Act
Social:
- Working time and occupational safety requirements
- Minimum wage regulations
- Equal treatment and diversity (AGG, Leadership Positions Act)
- Accessibility (Accessibility Enhancement Act)
- Human rights such as Supply Chain Due Diligence Act, CSDDD
- Sustainability reporting (CSRD)
Governance (corporate governance):
- Money laundering prevention and transparency register
- Whistleblower Protection Act
- Lobbying register obligations
- Compliance measures (anti-corruption, internal investigations)
- Risk management and control systems
Soft ESG criteria (examples of soft law)
Environmental:
- Strategies for reducing energy, water, waste and CO₂ consumption
- Preparation of carbon footprints (Scope 1–3)
- Climate adaptation measures
- Environmental certifications
Social:
- Sustainability training
- Equal pay and employee satisfaction
- Health and safety measures in the workplace
- Staff turnover and employee retention
- Diversity and equality strategies
Governance:
- Sustainability strategy and materiality analysis
- ESG responsibility at management level
- ESG officers and guidelines (code of conduct)
- Sustainability reports
- ESG criteria in executive remuneration
- Business partner audits
- Sustainability ratings and certificates
Conclusion
Buyers must systematically and comprehensively examine ESG aspects to avoid liability risks and secure sustainable corporate values. Integrating ESG into legal due diligence is therefore not only legally required, but also strategically advisable.
