Supply Chain ESG Due Diligence of Acquisition Target for European Private Equity Firm

The client, a prominent European private equity firm, was contemplating the acquisition of a Swedish high-tech electronics manufacturer. The target company had outsourced its entire production operations to three Chinese contract manufacturers since before.

The focus, beyond the commercial, financial, and legal performance, was the ESG (Environmental, Social, Governance) performance of the target’s supply chain. Hence, ARC Consulting was hired to conduct an in-depth supply chain ESG due diligence.

The objective was to deliver a comprehensive analysis of both the target company and its Chinese suppliers, facilitating a well-informed decision-making process.

Electronics production line

By integrating supply chain ESG due diligence into the acquisition process, the client was able to assess the effectiveness of the supply chain – a crucial factor influencing the target’s operational performance. Furthermore, it allowed them to identify and mitigate potential ESG risks before finalizing the acquisition.

The primary deliverable was a detailed ESG due diligence report , formulated to guide the client through their investment decision-making process. The information necessary for this report was gathered via three methodologies: desktop research, management interviews, and on-site inspections of the contract manufacturers.

Desktop research and database reviews served to collect fundamental data about the contract manufacturers. This process enabled us to identify and evaluate key aspects such as legal status, ownership structure, and production capabilities of each supplier.

We conducted interviews with representatives from both the potential acquisition company and its suppliers. The discussions were primarily centered on critical ESG components, encompassing Environmental (pollution control, waste disposal, energy consumption, GHG emission control), Social (labour and human rights, health and safety, diversity) and Governance (board structure, management payroll policy, compliance policy).

Lastly, on-site visits provided us with an opportunity to verify the production facilities, equipment, and manufacturing capacity of the contract manufacturers.

Our data-driven analysis equipped the client with an unbiased validation of their investment hypothesis and a nuanced understanding of the operational aspects of the proposal. This deep-dive helped the client comprehend the true worth of the acquisition target, as well as the risks linked to third-party manufacturers in China, with a particular emphasis on ESG.

Our meticulous due diligence enabled the client to strategically refine their acquisition strategy, prioritizing key areas and mitigating unnecessary risks, ultimately securing a successful transaction.

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