Why Must Legal Advisors Integrate ESG into Due Diligence?

Environmental, Social, and Governance (ESG) factors have moved from the margins of corporate strategy to the centre of investment, regulatory, and reputational considerations.  

According to Deloitte, global ESG-related assets under management could exceed US$35 trillion by 2026, accounting for over one-fifth of total global assets. This transformation is reshaping due diligence processes for legal advisors, moving beyond a focus on financials, contracts, and compliance to include a thorough analysis of sustainability risks, governance frameworks, and ethical practices.  

Recent high-profile cases, such as those involving greenwashing and international ESG compliance, highlight the necessity of robust due diligence for corporate resilience and growth. At AgileIntel, we recognise that integrating ESG is now a fundamental aspect of deal structuring, risk analysis, and client advisory.  

Why ESG Matters in Legal Due Diligence  

Legal due diligence has traditionally aimed to identify risks that could disrupt valuations, compliance, or transaction outcomes. ESG factors now broaden this focus in three significant ways:  

• Regulatory exposure: With climate disclosure regulations emerging in the EU and proposed by the U.S. Securities and Exchange Commission, legal teams must evaluate current compliance and the evolving landscape of obligations.  

• Reputational risks: Brands associated with poor labour practices or environmental negligence risk public backlash, litigation, and loss of investor trust.  

• Operational resilience: Supply chain sustainability, data governance, and board accountability increasingly impact long-term stability and market positioning.  

Neglecting these aspects can lead to incomplete due diligence and potentially undervalued or overexposed transactions.  

How Firms Are Applying AI to Serve Clients Better

A notable case involving Santos Ltd., a key player in the energy sector, illustrates the serious consequences of ESG missteps.  

• In August 2021, the Australian Centre for Corporate Responsibility (ACCR) sued Santos for alleged greenwashing, claiming the company misled the public about its environmental commitments while pursuing significant fossil fuel projects. The Federal Court of Australia heard allegations that Santos misrepresented its net-zero ambitions, indicating that regulatory and legal scrutiny of environmental claims will intensify. This case underscores the importance of ESG-focused legal due diligence in protecting companies from reputational, financial, and regulatory repercussions.  

• BlackRock's legal challenges on ESG disclosures: As the world's largest asset manager, BlackRock has faced increased scrutiny from regulators and investors regarding the transparency and execution of its ESG commitments. This highlights the critical role of legal advisors in ensuring that ESG statements withstand legal and reputational scrutiny.  

• Rio Tinto and the Juukan Gorge destruction: In 2020, Rio Tinto, a leading global mining company, legally destroyed a 46,000-year-old Aboriginal heritage site in Western Australia during an iron ore expansion. While the action was permitted, the reputational fallout and subsequent executive resignations demonstrated the need for legal due diligence to consider broader ESG expectations beyond mere compliance.  

• Boohoo's labour practices scandal: In 2020, Boohoo, a UK-based online fashion retailer, faced allegations of severe labour exploitation in its supply chain. Despite compliance with specific local standards, the company lost billions in market value after reports emerged. Today's Legal advisors are expected to assess supply chain governance to avert such ESG-related crises.  

These examples illustrate that ESG diligence is not merely theoretical; it has tangible impacts on market outcomes and legal disputes.  

How Legal Advisors Are Adapting  

At AgileIntel, we observe a growing trend among law firms and in-house legal teams to develop specialised ESG due diligence frameworks, which often include:  

• Climate and environmental risk reviews: Evaluating exposure to carbon-intensive assets, environmental litigation, and regulatory compliance in line with standards like the EU Taxonomy and Task Force on Climate-related Financial Disclosures (TCFD).  

• Governance audits: Assessing board structures, diversity, executive accountability, and anti-corruption measures.  

• Human rights and labour assessments: Reviewing policies against international standards such as the UN Guiding Principles on Business and Human Rights (UNGPs). 

  
  

• Contractual safeguards: Incorporating ESG clauses into joint ventures, supplier agreements, and financing contracts to mitigate downstream risks.  

Legal advisors increasingly collaborate with ESG consultants, auditors, and data providers to ensure that due diligence captures qualitative and quantitative risks.  

ESG and Transaction Structuring  

ESG considerations are also influencing deal structuring. For example:  

• Private equity transactions: Firms like KKR and Carlyle have integrated ESG screenings into portfolio acquisition and monitoring processes. Legal advisors are crucial in drafting warranties and indemnities, as well as reporting obligations related to ESG metrics.  

• Cross-border deals: With differing ESG regulations across jurisdictions, legal advisors ensure compliance with the strictest applicable standards, minimising the risk of post-transaction disputes.  

• Financing arrangements: Banks are increasingly requiring ESG-linked covenants in loan agreements. Legal advisors must interpret and negotiate these terms to safeguard client interests while maintaining access to sustainable finance.  

Challenges in ESG Due Diligence  

Despite its significance, ESG due diligence faces several challenges:  

• Data inconsistency: Unlike financial reporting, ESG disclosures lack uniform global standards, complicating verification.  

• Greenwashing risks: Companies may overstate their ESG credentials. Legal advisors must validate claims against third-party audits, certifications, or industry benchmarks.  

• Dynamic regulations: The evolving patchwork of rules across the EU, U.S., and Asia necessitates adaptable due diligence frameworks.  

The Road Ahead  

As ESG integration deepens, legal due diligence is likely to evolve in three key areas:  

• Standardisation: Increased harmonisation of disclosure standards, such as those from the International Sustainability Standards Board (ISSB), will enhance data reliability. 

  
  

• Technology integration: AI-driven tools will assist legal advisors in processing ESG data, identifying red flags, and simulating regulatory scenarios.  

• Client education: Law firms will increasingly take on the role of educators, guiding clients on compliance and the strategic opportunities presented by ESG frameworks.  

Conclusion  

The rise of ESG signifies a paradigm shift in legal due diligence. Beyond financial and contractual risks, advisors must now evaluate sustainability, governance, and ethical dimensions that influence long-term resilience. Cases involving BlackRock, Rio Tinto, and Boohoo illustrate how ESG oversights can escalate into financial, legal, and reputational crises.   

At AgileIntel, ESG-driven due diligence is not just about risk avoidance but positioning clients for success in a landscape where responsible business practices are integral to legal resilience.