- This article launches a Horizon & Beyond series exploring how climate and environmental issues concretely affect financial decision-making in scenarios such as acquisitions, financing, and portfolio transformations.
- When evaluating an acquisition target, climate analysis extends beyond the company's own assets to its full network of dependencies, including suppliers, logistics, and infrastructure exposed to physical climate hazards.
- Business plan projections may understate required capital expenditure, as additional investments in adaptation, energy efficiency, and supply chain resilience can significantly affect cash flows and valuations.
- Climate considerations influence not only the cost structure but also revenue prospects, since shifting customer demands for decarbonisation and emerging market needs can reshape a company's competitive positioning.
- Integrating climate factors into due diligence does not necessarily mean abandoning a deal, but rather adjusting financial assumptions, valuations, and value creation plans to reflect the transition risks and opportunities ahead.
Introduction
What if we started with the concrete decisions financial professionals face?
With this article, Horizon & Beyond is launching a new series dedicated to exploring the transition through practical financial use cases. Acquisitions, financing, portfolio company transformation, value chains and insurability: each episode will start with a professional situation to explore how climate and environmental issues can influence analysis and inform decision-making.
For this first case, let us take the perspective of an investor considering the acquisition of a company. Its financial fundamentals are solid, its growth prospects attractive and its business plan compelling.
What happens when climate considerations are added to the analysis?
1. The starting point: an attractive target
Imagine a mid-sized industrial company. It has delivered steady growth, healthy margins, a diversified customer portfolio and favourable commercial prospects. An investment fund is considering acquiring the company and supporting its next phase of development.
The initial analyses reinforce the attractiveness of the transaction. Historical performance is solid, debt levels are under control and the business plan projects continued growth over the coming years.
The due diligence process moves forward.
Then another perspective on the company begins to emerge.
What do we know about its sites’ exposure to climate hazards? Its energy and water consumption? The vulnerability of its main suppliers? The investments that may be required to adapt its production facilities? The expected evolution of its markets?
None of these factors necessarily calls the acquisition into question. But each of them may affect some of the assumptions underlying the company’s valuation.
2. Looking beyond the company’s own assets
The first step is to understand where the business is genuinely vulnerable.
The analysis can begin with production sites. Are they exposed to heatwaves, floods, droughts or other events that could disrupt operations? Are the infrastructures they depend on, including electricity, transport and water supply, themselves vulnerable?
The relevant scope quickly extends beyond the assets directly owned by the company.
A strategic supplier located in an exposed area can become a source of vulnerability. A raw material may become more expensive or less readily available. A logistics disruption can slow production even when the company’s own facilities continue to operate normally.
Climate considerations therefore lead us to view the company as a network of dependencies, rather than simply a collection of assets and financial flows.
For the acquirer, several questions become relevant. Are there suppliers that would be difficult to replace? Are certain supplies concentrated in a single region? How long would it take to find an alternative? Would a disruption lasting several weeks have a significant impact on operations?
These are highly operational questions. Yet their answers can ultimately translate directly into the business plan.
3. Identifying the investments hidden behind the projections
Let us return to our hypothetical company.
Its business plan forecasts EBITDA(1) growth and relatively stable investment levels. But this assumption relies on its industrial assets continuing to operate under conditions similar to those observed today.
The analysis, however, identifies several potential needs: improving the cooling of certain equipment, reducing water consumption, increasing energy efficiency, adapting certain processes or securing strategic suppliers.
The question then evolves: beyond the investments already planned, what additional investment will be required to achieve the expected performance?
Additional Capex(2) may weigh on short-term cash flows. At the same time, these investments may reduce resource consumption, secure production, limit exposure to price volatility or prepare the company for changes in its market.
For the investor, the challenge is therefore to understand which investments are required, over what timeframe and with what expected effects on the business model.
In other words, Capex requirements associated with transition or adaptation are not simply costs to deduct from a valuation. They can also become part of the value creation plan.
Real-life case — When physical risk directly affects the acquisition price
PwC reports the case of a Private Equity fund considering the acquisition of an electric vehicle charging operator. The analysis combined the location of the company’s assets with different climate scenarios to estimate potential damage from events including floods and storms, as well as the associated repair costs and potential loss of revenue.
While the financial impact appeared limited over the anticipated holding period, exposure became more significant over the longer term, with potential implications for the exit value. The fund ultimately adjusted its offer to reflect this risk.
4. Looking beyond costs
The analysis can then turn to revenues.
Suppose that a significant proportion of our company’s customers are large corporations pursuing their own decarbonisation pathways. These customers are beginning to request more information from their suppliers about emissions, energy consumption and transition plans.
The company’s ability to meet these expectations may therefore have commercial implications.
Conversely, certain products or services may benefit from changing markets. A company capable of offering solutions that consume less energy, use fewer resources or respond to new constraints may strengthen its competitive positioning.
Climate analysis is therefore not solely about identifying what might cost more.
It also means considering where future growth could come from, which markets may evolve, which products could become less attractive and which could benefit from emerging needs.
For an investor, the transition can therefore affect both sides of the business plan: the cost structure and revenue prospects.
5. What if this changes the valuation?
At this stage, a new line labelled “climate risk” will not necessarily appear in the financial model. The effects may be much more diffuse.
Additional Capex affects cash flows(3). Sustained increases in energy costs can put pressure on margins. Production disruptions can affect revenue. Adaptation expenditure can help secure an asset. Changes in demand can alter growth assumptions. Changes in insurance conditions can increase certain operating costs.
Climate considerations therefore enter the valuation through the financial assumptions they may affect.
This is perhaps one of the most important aspects of the exercise: the objective is not necessarily to build a separate “ESG valuation” alongside the financial valuation.
Rather, the question is whether the assumptions used to value the company adequately reflect the transformations it may face.
Is the assumed EBITDA level sustainable? Is the planned Capex sufficient? Are the growth assumptions still consistent? Are the main operational risks incorporated? And, for an investment fund, will the assumptions made about the exit still be plausible several years from now?
Real-life case — Quantifying risks before investing
When acquiring International-Matex Tank Terminals (IMTT), Riverstone incorporated environmental and climate considerations into its due diligence. The analysis conducted with ERM covered areas including soil and groundwater, facility integrity and asset exposure to medium- and long-term climate risks.
For the main risks identified, the short- and long-term financial implications of the required measures were also estimated. The analysis therefore went beyond identifying risks and sought to translate some of them into investment requirements and concrete measures.
6. New information does not necessarily mean walking away
Now imagine that the due diligence confirms several investment requirements.
The company remains attractive, but the assessment is different from the one made at the beginning of the analysis.
The investor then has several levers available.
They can conduct further due diligence, revise business plan assumptions, incorporate additional investments, adjust the structure or terms of the transaction, establish priorities for the first years of ownership or introduce specific indicators to monitor the portfolio company.
In some cases, the findings may also contribute to discussions around valuation.
More importantly, this analysis helps distinguish between two very different situations: a company that is exposed without a clear strategy to reduce that exposure, and a company facing the same constraints but equipped with the resources, investment plans and governance required to address them.
Exposure alone therefore tells only part of the story.
The company’s ability to transform tells another.
7. From due diligence to the value creation plan
This is perhaps where the exercise becomes particularly interesting for Private Equity.
Due diligence no longer serves solely to identify risks ahead of a transaction. It can also help shape part of the post-acquisition transformation programme.
The vulnerabilities identified can become management priorities: diversifying supply sources, improving energy efficiency, adapting a site, evolving a product, investing in a process, improving data quality or introducing indicators to monitor progress.
The analysis conducted before the acquisition and the post-acquisition value creation plan can therefore begin to converge.
This also changes the way the transition itself is approached. The question is no longer simply whether a company has a “good” or “bad” ESG profile.
It becomes much more concrete:
Which factors could affect its future performance, what investments could address them, and how can they be incorporated into the investment decision today?
Real-life case — When due diligence already prepares the post-acquisition phase
The Riverstone–IMTT case also illustrates the continuity between pre-acquisition analysis and the holding period. Improvement opportunities identified during due diligence led to risk mitigation measures and informed both the investment thesis and post-acquisition planning. Areas identified included strengthening asset resilience to climate change and improving certain monitoring processes.
Due diligence can therefore become more than a pre-acquisition verification exercise: it can provide the starting point for a transformation and value creation roadmap.
Conclusion
Integrating climate considerations into an acquisition therefore goes beyond simply adding an ESG analysis to the due diligence process. It can lead investors to revisit certain business plan assumptions, identify future investment requirements and better understand the conditions that will support the company’s value creation.
The question then becomes: does due diligence simply help us understand the company as it stands today, or also what will need to be invested to keep it performing tomorrow?
This first case launches our new series, “Finance in Practice: When the Transition Changes the Decision.” In the next episodes, we will successively take the perspective of a lender, an investor during the holding period, and decision-makers facing risks related to value chains and asset insurability.
(1) EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation): a measure of a company’s operating performance before interest, taxes, depreciation and amortisation.
(2) Capex (Capital Expenditures): investment expenditure used to acquire, replace or improve long-term assets such as equipment, buildings or infrastructure.
(3) Cash flows: cash inflows and outflows generated by a company’s operations and investments over a given period.
Frequently Asked Questions
Climate change can affect a company's valuation through multiple financial assumptions: additional capital expenditures for adaptation, pressure on margins from rising energy costs, production disruptions impacting revenue, changes in demand altering growth projections, and evolving insurance conditions increasing operating costs. Rather than creating a separate 'ESG valuation,' the goal is to assess whether the financial assumptions underlying the valuation adequately reflect the climate-related transformations the company may face.
Investors should assess exposure of production sites to physical hazards like heatwaves, floods, and droughts, as well as the vulnerability of critical infrastructure such as electricity, transport, and water supply. The analysis should also extend to supply chain dependencies, including strategic suppliers in exposed areas, concentration of supplies in single regions, and the potential impact of logistics disruptions on operations.
Climate adaptation investments—such as improving equipment cooling, reducing water consumption, or securing strategic suppliers—may create additional Capex that weighs on short-term cash flows. However, these investments can also reduce resource consumption, limit exposure to price volatility, and secure production, making them a potential part of the value creation plan rather than simply costs to deduct from a valuation.
Yes, climate transition can positively affect revenue prospects. Companies capable of offering solutions that consume less energy, use fewer resources, or respond to emerging environmental constraints can strengthen their competitive positioning. Additionally, as large corporate customers pursue decarbonisation, suppliers who meet their sustainability expectations may gain a commercial advantage.
Yes, PwC reported a case where a Private Equity fund considering the acquisition of an electric vehicle charging operator adjusted its offer after analyzing climate scenarios. The analysis estimated potential damage from floods and storms, associated repair costs, and revenue losses, revealing that while short-term impact was limited, longer-term exposure was significant with implications for exit value.
