A private equity investor was evaluating the acquisition of an Indian manufacturing company. The business had been operating for more than 15 years, had established customers, and was generating consistent revenue. Its financial statements looked healthy, the production facilities were operational, and the management team was confident about the proposed transaction.
However, during a factory visit, the investor’s technical team noticed something unusual. The company had recently expanded its production line, but the environmental approval documents available for review still reflected its earlier operating capacity. When the team requested electricity consumption records, waste disposal documents, and employee safety reports, several records were incomplete or difficult to reconcile.
The concern was not whether the company could generate profits. The investor wanted to understand whether the business could continue operating without unexpected regulatory costs, environmental liabilities, or disruptions.
This is where ESG due diligence in India becomes important.
ESG due diligence helps investors, private equity firms, lenders, and corporate buyers evaluate the environmental, social, and governance risks associated with a business before completing an investment or acquisition. It goes beyond financial performance to examine whether the company’s operations, regulatory approvals, workforce practices, and management systems can support its future growth.
For Indian businesses planning to raise capital, attract foreign investment, or sell an operating facility, understanding these expectations can make a significant difference during transaction negotiations.
The opening example is illustrative and does not describe an actual client transaction.
ESG due diligence is a structured assessment of a company’s environmental, social, and governance performance before an investment, acquisition, financing arrangement, or significant commercial agreement.
Traditional financial due diligence focuses on revenue, profitability, assets, liabilities, taxation, and cash flow. ESG due diligence examines risks that may not be fully reflected in those financial statements.
For example, a factory may generate strong profits while operating with outdated environmental permissions. A recycling company may have valuable assets but insufficient documentation proving that hazardous waste is being managed through authorized facilities.
Similarly, a business may present a sustainability report containing emission reduction commitments without maintaining reliable records to support those claims.
Investors use ESG due diligence to understand these issues before committing capital.
The assessment generally covers three broad areas:
Not every business requires the same assessment. A technology company may face relatively limited direct environmental risks, whereas a chemical manufacturing unit, recycling facility, or infrastructure project may require extensive technical and site-level investigation.
Investors are not purchasing only a company’s current earnings. They are also accepting exposure to its future operating costs, regulatory obligations, environmental responsibilities, and potential business interruptions.
Suppose an investor acquires a manufacturing facility and subsequently discovers that the wastewater treatment system requires substantial upgrading. The investment needed to correct that deficiency may reduce the expected return from the acquisition.
Environmental contamination, unresolved employee safety issues, or weaknesses in corporate governance can create similar challenges.
An ESG review helps investors identify such exposures before they become part of the acquired business.
It also allows buyers to distinguish between manageable weaknesses and risks that require more extensive investigation.
A missing internal policy may be relatively straightforward to correct. However, an unresolved pollution-control order, potential site contamination, or a significant discrepancy in statutory records may require technical studies, legal advice, and additional financial provisions.
The purpose is not to reject every business with ESG weaknesses. It is to understand the actual risks and determine whether the transaction remains commercially attractive.
For manufacturing and industrial businesses, environmental compliance is often one of the most important areas of ESG due diligence.
Investors examine whether a company has obtained the environmental permissions required for its activities and whether those permissions remain consistent with actual operations.
In India, industrial facilities may require approvals from the relevant State Pollution Control Board (SPCB), Pollution Control Committee (PCC), or other competent authorities, depending on the nature of the project.
Two important approvals are Consent to Establish (CTE) and Consent to Operate (CTO), where applicable.
A CTE generally relates to establishing an industrial activity, while a CTO concerns operating the facility under specified conditions. However, applicability, procedures, and conditions depend on the relevant laws, industry category, and jurisdiction.
During ESG due diligence, investors may examine the following:
One important verification is whether the approvals match the activities actually taking place.
For example, a company may have obtained permission for an earlier production configuration but subsequently installed additional equipment or modified its process. Such changes may require regulatory review or updated permissions.
Investors will want to understand whether any required approvals were obtained before the changes were implemented.
Environmental compliance therefore involves more than checking whether a certificate exists. It requires comparing legal permissions with actual operating conditions.
Waste management becomes particularly important when the target company manufactures electronics, batteries, plastic-packaged products, chemicals, or operates a recycling facility.
India has separate regulatory frameworks for different waste streams. Businesses may have obligations under the E-Waste (Management) Rules, 2022, Battery Waste Management Rules, 2022, Plastic Waste Management Rules, 2016, and Hazardous and Other Wastes (Management and Transboundary Movement) Rules, 2016, as amended.
These frameworks cannot be treated as interchangeable because registration categories, reporting requirements, and compliance responsibilities differ.
Investors examine whether the company has identified its applicable obligations and maintained the necessary registrations, returns, and transaction records.
For businesses subject to Extended Producer Responsibility (EPR), the assessment may include registration status, relevant product categories, recycling obligations, annual returns, and applicable certificate transactions.
For recycling companies, the review may extend to input quantities, processing records, recovered materials, authorized capacity, and the destination of waste or residues.
A major concern arises when material quantities reported in different documents cannot be reconciled.
For example, the quantity of waste received at a recycling facility should be examined alongside production records, inventory movements, dispatch documents, and relevant regulatory filings.
Any unexplained difference requires investigation before the investor can assess its significance.
Investors increasingly examine how businesses use energy and whether their operations may face future climate-related costs.
This is particularly relevant to companies operating furnaces, boilers, heavy machinery, chemical processing systems, or other energy-intensive equipment.
Greenhouse gas accounting commonly divides emissions into three categories.
Scope 1 emissions arise directly from sources owned or controlled by the company, such as fuel combustion in certain boilers, furnaces, generators, and company vehicles.
Scope 2 emissions arise from purchased electricity, steam, heating, or cooling consumed by the business.
Scope 3 emissions include other indirect emissions across relevant upstream and downstream activities, such as purchased materials, transportation, business travel, and product use.
A carbon assessment considers the company’s organizational boundaries, reporting period, emission sources, calculation methods, and available evidence.
For a manufacturing facility, investors may request electricity bills, fuel purchase records, production figures, and relevant greenhouse gas calculations. Reviewing 12 months of operating data can help establish an initial annual picture, although longer historical periods may be needed to understand trends.
The assessment should also consider whether future investments in energy efficiency, renewable electricity, or pollution-control systems may be required.
For exporters supplying products covered by the European Union’s Carbon Border Adjustment Mechanism (CBAM), product-level emissions information may also be relevant to customer requirements.
Climate due diligence is not limited to emissions. Water scarcity, flooding, extreme heat, and disruptions to raw-material supply may also affect long-term business performance.
A company may have modern production equipment and strong financial performance while maintaining inadequate worker safety systems.
For investors, such weaknesses can create legal exposure, operational disruption, and reputational concerns.
Social due diligence examines whether the company provides appropriate working conditions and complies with applicable labour, occupational safety, and employment requirements.
The review may consider employee contracts, wage and working-hour records, statutory benefits, contractor practices, safety training, accident registers, and grievance procedures.
For manufacturing businesses, physical inspections are particularly valuable.
An investor may want to confirm whether workers handling hazardous substances have received appropriate training and whether emergency exits, fire protection, ventilation, and personal protective equipment are adequate for the actual activities undertaken.
Where contractors perform high-risk operations, the review should also examine how their safety responsibilities are managed.
Written policies provide useful evidence, but they do not prove implementation on their own.
A workplace may have a safety manual yet maintain incomplete training records or unresolved incident investigations.
Investors therefore compare management statements with employee records, incident documentation, and observations made during site visits.
Governance is sometimes less visible than environmental compliance, but it can be equally important to an investor.
Good governance helps establish whether a company makes decisions transparently, manages conflicts of interest, and maintains reliable internal controls.
Investors examine the company’s ownership structure, board responsibilities, significant related-party transactions, regulatory disputes, and arrangements for reporting irregularities.
They may also review management information systems, internal approvals, anti-bribery policies, and the treatment of whistleblower complaints.
Consider a company where significant purchases are made from businesses connected to its promoters.
These transactions are not necessarily improper. However, investors may want to verify the commercial terms, approval process, disclosures, and applicable legal compliance.
Another important issue is the accuracy of management representations.
If a company claims that all its facilities are environmentally compliant, the investor may request supporting approvals and inspection records rather than relying entirely on a management declaration.
Reliable governance reduces uncertainty because investors can understand who is responsible for decisions and how information is verified.
Investors are increasingly looking beyond the company’s own facilities.
A manufacturer’s environmental and social exposure may extend to raw-material suppliers, transporters, contractors, waste processors, and other important business partners.
Supply chain ESG due diligence examines whether the company has appropriate procedures for selecting suppliers, monitoring performance, and managing significant compliance risks.
For example, an electronics manufacturer may purchase components from multiple suppliers while outsourcing waste processing to a registered recycler.
The investor may assess whether these suppliers and service providers have appropriate approvals, contractual responsibilities, and supporting records.
For companies exporting to international markets, customer-specific sustainability requirements can add another layer of scrutiny.
Not every supplier must undergo the same depth of assessment. A risk-based approach normally prioritizes suppliers according to their activities, significance, geography, and exposure to environmental or social risks.
India’s ESG reporting framework has become more structured through the Securities and Exchange Board of India (SEBI).
Business Responsibility and Sustainability Reporting (BRSR) is mandatory for the top 1,000 listed entities by market capitalization under the applicable SEBI framework.
BRSR Core, introduced in 2023, identifies selected key performance indicators across 9 ESG attributes to improve the consistency and credibility of sustainability information.
The framework follows a phased approach for assessment or assurance of BRSR Core disclosures.
For FY 2025-26, this requirement applies to the top 500 listed entities by market capitalization. For FY 2026-27, the prescribed coverage extends to the top 1,000 listed entities.
Under SEBI’s March 2025 framework, value-chain ESG disclosures are voluntary for the top 250 listed entities from FY 2025-26. Assessment or assurance of those value-chain disclosures is also voluntary from FY 2026-27.
These distinctions matter because an unlisted manufacturer or MSME should not automatically be treated as subject to the same reporting obligations as a covered listed entity.
However, investors, lenders, and large customers may still request ESG information as part of their commercial due diligence.
International investors may also evaluate businesses using the International Finance Corporation’s 8 Environmental and Social Performance Standards, depending on their investment policies and contractual requirements.
A meaningful ESG assessment normally begins by defining the scope of the transaction.
The consultant identifies the legal entities, operating locations, business activities, major assets, and applicable regulatory requirements.
For a company operating 3 manufacturing facilities, each location may have different permits, environmental conditions, and workforce arrangements. Reviewing only the registered office would not provide an adequate picture of operational risk.
The next stage involves examining documents and supporting evidence.
Environmental approvals, regulatory correspondence, energy consumption, waste movement records, employee safety information, and governance policies are compared with actual operations.
Where necessary, the team conducts factory inspections and interviews relevant personnel. Specialist investigations may be required for issues such as suspected soil contamination or complex technical deficiencies.
The identified findings are then classified according to their significance.
An effective final report should explain what was verified, what remains uncertain, which corrective actions may be required, and how the findings could influence the transaction.
Investors often establish a document checklist before beginning the assessment. The exact requirements depend on the industry, transaction size, and operating activities.
For an industrial acquisition, the following documents are commonly useful:
Where a business has multiple facilities, documents should be organized location-wise.
For example, a company with 2 plants should maintain separate site-level environmental approval records even if certain reporting systems are managed centrally.
This approach makes discrepancies easier to identify and allows investors to understand the compliance position of each operating facility.
Not every ESG finding has the same commercial impact.
Some issues can be corrected through documentation improvements or relatively straightforward operational changes. Others may require significant capital expenditure, regulatory approvals, specialist investigation, or ongoing monitoring.
Investors generally assess whether an identified issue affects the company’s ability to operate, its future cash flows, or its exposure to liabilities.
For instance, an aging effluent treatment plant may require upgrading. The estimated cost should be examined in the financial model rather than assumed to have no effect on the acquisition.
Similarly, unresolved environmental notices may require legal and technical assessment before the buyer can determine whether additional protections are appropriate.
Depending on the circumstances, ESG findings may influence the purchase price, representations and warranties, indemnities, escrow arrangements, conditions precedent, or post-acquisition corrective action commitments.
There is no standard percentage by which ESG risks automatically reduce a company’s valuation.
The financial impact depends on the actual exposure, probability of loss, remediation costs, and negotiated allocation of risk.
Consider a hypothetical investor evaluating a company operating 2 industrial facilities involved in metal processing and component manufacturing.
The business has established customers and plans to expand production after the acquisition.
During the initial document review, the investor’s team identifies that environmental records are well organized for the first facility. However, documents for the second facility do not clearly establish whether a recent process expansion is covered by the existing operating approval.
The company also reports lower energy consumption per tonne of finished product, but the supporting calculation does not account for a change in outsourced production.
These findings raise two separate concerns.
The first relates to whether the expanded industrial activity has obtained all applicable approvals. The second concerns the reliability of the company’s sustainability performance data.
Instead of treating both issues as identical, the investor requests targeted investigations.
The environmental consultant assesses the regulatory position of the second facility, while the sustainability team recalculates the relevant energy-intensity figures using consistent production boundaries.
Management then prepares a corrective action plan with responsible owners and supporting documentation.
The investor can use the verified findings to determine whether the transaction should proceed under the proposed terms or whether additional conditions are required.
This illustrates why ESG due diligence should focus on evidence and commercial consequences rather than simply assigning a sustainability score.
Companies expecting investment, acquisition interest, or major customer onboarding should begin preparing before the formal review starts.
The first step is to identify the environmental and sustainability requirements applicable to each facility and business activity.
Management should then verify that approvals remain current, production and waste records are consistent, and major compliance responsibilities have been assigned to appropriate personnel.
It is also useful to establish a common reporting system for environmental, social, and governance information.
Where deficiencies are found, the company should document corrective actions and maintain evidence of completion.
A pre-investment ESG gap assessment can be particularly useful for businesses with multiple industrial sites, recent capacity expansions, complex waste streams, or incomplete historical records.
The goal is not to make the company appear free from risk. It is to give investors reliable information and demonstrate that management understands its responsibilities.
No. There is no single universal requirement for ESG due diligence in every Indian business transaction. However, companies must comply with applicable environmental, labour, and governance laws. Investors, lenders, and customers may independently require ESG reviews under their transaction or contractual arrangements.
An ESG audit usually assesses compliance or performance against defined criteria. ESG due diligence is generally conducted in connection with an investment, acquisition, financing arrangement, or major commercial decision. It focuses on identifying material risks, potential liabilities, and their implications for the proposed transaction.
The cost depends on the number of facilities, industry, assessment scope, available documentation, site visits, and specialist investigations required. A single-office service business may require a different level of assessment from a manufacturing group operating multiple factories. A fee should be estimated after defining the scope.
The timeline depends on document availability, the number of locations, the complexity of operations, and whether specialist investigations are required. The process may be extended when the review identifies missing approvals, inconsistent records, or environmental conditions requiring additional technical assessment.
Yes. Material ESG findings can influence valuation, investment conditions, risk allocation, and post-acquisition expenditure. However, the presence of an ESG deficiency does not automatically prevent a transaction. Investors consider its seriousness, corrective action requirements, and commercial implications.
ESG due diligence in India is becoming an important part of how investors and buyers evaluate businesses before making long-term financial commitments.
A company may have strong revenue, valuable assets, and attractive growth prospects, but investors still need confidence that its environmental permissions, workforce practices, governance systems, and operational records can withstand scrutiny.
For manufacturers, recyclers, exporters, and other industrial businesses, early preparation helps identify risks before they become transaction obstacles.
The most useful ESG assessment is one that connects regulatory requirements and operational evidence with practical business decisions.
It allows investors to understand what they are acquiring, what additional investment may be necessary, and which risks require appropriate safeguards.
Green Permits Consulting provides ESG advisory and environmental compliance support for Indian businesses preparing for investments, acquisitions, financing, and major customer assessments.
Learn more about our ESG Due Diligence Consulting Services and how structured risk assessments can help businesses improve their documentation and compliance readiness.
Preparing for an investment or acquisition? Green Permits Consulting can assist with ESG gap assessments, environmental compliance reviews, sustainability documentation, and corrective action planning.
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