Climate Disclosure Readiness in Transactions: Using Due Diligence to Prevent Post-Closing Reporting Surprises
Following the well-publicized rollback and simplification of sustainability rules in the United States and Europe, companies might assume that this is no longer an area that needs attention in transactions. However, this is certainly not the case: the impact of both mandatory sustainability regulations and voluntary commitments needs to be carefully considered on both sides of the Atlantic. Acquirers who skip sustainability diligence risk expensive post-close surprises: inherited emissions data gaps, weak controls over sustainability metrics, missing contractual rights to collect supplier data, and unexpected reporting obligations.
Application of Sustainability Regulations
Many sustainability reporting regimes apply only above certain thresholds, and application analysis is often more complex than anticipated. For example, the European Corporate Sustainability Due Diligence Directive applies to global groups that generate more than €450 million of turnover "in the EU." This metric is not something finance teams would usually track or report, and it may require analysis of client contracts to establish precisely to which entity a firm is providing goods or services. In the context of an M&A transaction, an acquirer will want to understand whether the newly combined group would exceed this (or any other) thresholds and become newly subject to sustainability rules.
Thresholds are also a moving target. Deal teams should test applicability against both current and proposed thresholds, recognizing that a deal closing in 2026 may face different rules in 2028.
Some regimes have no thresholds. For example, recent addition to the Mexican accounting standards ("NIF") requires any Mexican entity preparing financials under NIF to make dozens of sustainability disclosures regardless of size. Similarly, upcoming UAE rules require disclosure of certain GHG metrics, seemingly without a de minimis threshold. For acquirers buying entities in these jurisdictions, it may come as a surprise that group-level disclosures may be required in these regions, even if the local entities are relatively small.
Deal Structuring
Deal structure can significantly affect whether sustainability rules apply. For example, the EU Corporate Sustainability Reporting Directive ("CSRD") can apply to sub-groups headed by an entity meeting certain aggregated revenue and asset thresholds. It is common to see structures headed by Irish, Dutch, and Luxembourg entities. If that EU-headed sub-group contains both EU and non-EU entities, then it is possible that this sub-group might fall within scope of CSRD when it would not have done so if non-EU entities had been placed elsewhere in the group structure. Tax structuring considerations will generally take precedence over sustainability rule applicability; however, this decision should be made in light of all relevant factors. Relatively minor structural changes might have a significant impact from a sustainability perspective without materially altering the tax analysis.
Data, Systems, and Controls
Whatever rules apply, any company making sustainability disclosures—mandatory or voluntary—needs reliable data and strong internal processes. This is a frequent source of post-close surprises and is often missed in diligence.
Emissions measurement maturity. Acquirers should assess the target's GHG data across all three scopes. Are emissions measured using standardized methodologies (e.g., the GHG Protocol) or estimated using proxies? Scope 3, often the largest share, is typically least mature: many targets have not mapped their value chains in enough detail to produce auditable figures. This assessment informs the post-close investment needed to comply with reporting standards.
Internal controls over sustainability data. As with financial reporting, sustainability metrics require governance and controls to ensure accuracy, completeness, and consistency. Where those controls are immature, acquirers face elevated greenwashing risk: disclosures based on ad hoc processes, manual spreadsheets, or unverified assumptions may fail under regulatory scrutiny, assurance, or litigation.
Mandatory and Voluntary Commitments
Amending targets or retracting commitments altogether can lead to potential claims of greenwashing or misleading shareholders. While those broader issues are not covered here, transaction impacts include:
- Hidden obligations: Public targets/claims can operate as "soft liabilities" (future capex, operational changes, supplier data collection, assurance costs) the buyer inherits on post-close.
- Diligence scope: Identify all commitments (reports, website pages, marketing decks, legacy PDFs) and test achievability—informing deal pricing and integration planning.
- Seller-side effects: Divestments can disrupt the seller's progress against its own targets, force recalibration, or shift entities into/out of reporting regimes.
- Deal protections: Findings may drive reps/warranties, disclosure schedules, covenants, indemnities/escrows, or closing conditions (e.g., remediation plan, data rights). In carve-outs, transition services agreements should secure access to shared sustainability data systems and emissions measurement infrastructure.
In summary, despite the fact that sustainability regulation is taking less of a prominent role in some quarters, the underlying obligations—and the risks associated with getting them wrong—remain significant. M&A teams that integrate climate disclosure readiness into their standard diligence are better positioned to identify risks early, price them accurately, and structure transactions that avoid the operational and reputational costs of post-close remediation.
