Climate Change – Due Diligence Questions your company should be prepared to answer

What can you do as a business executive to transition your company to net zero emissions and at the same time mitigate the risk of a changing climate on your company, its people and assets?

The starting point for your company is to be able to answer a few climate change related questions.

The answers to these questions will assist you to:

  • make your company more attractive to fund investors with an ESG focus, and to retail investors who are increasingly requiring companies they invest in to be more ESG and climate change active;
  • assist your company in answering questions from banks and other lenders on its climate response credentials; and
  • have your company ask the right questions in any vendor or buyer due diligence investigation.

The list of questions below will provide your company with an overview of what might be asked during a due diligence process.

High level questions

The Transition Pathway Initiative (TPI) established in 2017 asks some high-level questions to determine the level a company is at with its climate change initiatives. They have 5 levels:

Level 0: Unaware of climate change as a business issue
Level 1: Acknowledging climate change as a business issue
Level 2: Building capacity
Level 3: Integrating into operational decision making
Level 4: Strategic assessment.

Pleasingly, of the 479 companies TPI assesses:

  • 174 (36.33%) are at Level 3; and
  • 155 (32.36%) are at Level 4.

To determine whether a company is at Level 3, the TPI asks questions such as:

  • Has the company nominated a board member or board committee with explicit responsibility for oversight of its climate change policy?
  • Has the company set quantitative targets for reducing its greenhouse gas emissions?
  • Does the company report on Scope 3 emissions?
  • Has the company had its operational (Scope 1 and/or 2) greenhouse gas emissions data verified?
  • Does the company support domestic and international efforts to mitigate climate change?
  • Does the company have a process to manage climate-related risks?

We suggest you review the TPI questions to determine at which level your company is at with its climate change initiatives.

What questions might an ESG investor want answered before investing in your company?

‘ESG screening’ is becoming more relevant in the due diligence phase as ESG investors seek to direct their funds into opportunities that aligns with their ESG investment metrics and targets.

Some questions1 on your company’s climate change readiness an ESG investor might expect you to answer in the positive before they invest2 are:

  • will the company set a net zero target and within [# insert number of months] months after completion of the investment provide investors with its net zero transition plan?
  • will the company as soon as reasonably practical and no later than [# insert number of months] months after completion of the investment:
    • purchase electricity for its offices [and factory] on a green tariff that uses a 100% renewable energy;
    • use web hosts and cloud service providers which run their servers on 100% renewable energy or have a net zero target;
    • source all consumables used by the company from sustainable and ethical sources and include emissions reduction requirements in the company’s procurement strategy and supply chain contracts;
    • create KPIs to measure the company’s impact of its operations and the goods and services it provides;
    • [ensure the [casing/ packaging] for the company’s products are sourced from as much recycled material as possible and are themselves designed to have the smallest environmental impact];
    • [for online businesses] [provide the company’s customers the option to offset the carbon footprint of delivering the company’s products at the point of sale on the company’s website through a project that has been verified in accordance with [insert name of voluntary standard];
    • establish a sustainability committee as a committee of the board chaired by a non-executive director with experience of improving sustainability and mitigating carbon footprint;
    • develop and implement an environmental and sustainability training programme; and
    • set targets to support the achievement on one or more United Nations Sustainable Development Goals that are relevant to the business.

M&A Transactions – some climate change due diligence questions

Some or all of the following questions3 might find their way on to a due diligence questionnaire you might receive, or provide, in a buyer’s due diligence.

Sustainability overview

  • What does the company regard as the most important sustainability issues that its business faces?
  • Does the company have an environmental or sustainability policy which sets out commitments and targets to improve the company’s sustainability standards?

Climate change transition plan

  • Has the company set a Net Zero Target, a Science-Based Target or a Carbon Budget, joined Race to Zero4 or similar?
  • If yes, does the company have a plan to achieve its targets, including a timeline and short, medium and long-term interim targets?
  • Has the company adopted a climate change strategy?
  • Does the company assess, monitor and report its carbon and/or other GHG Emissions through Carbon Reporting, calculated in accordance with the GHG Protocol or such other equivalent and generally recognised greenhouse gas emission calculation methodology, or otherwise, including benchmarking versus peers and/or industry standards?


  • Does the company have a defined strategy for offsetting its Residual Emissions?
  • Does the company follow a mitigation hierarchy (i.e., only offsetting GHG Emissions after it has used all reasonable efforts to first reduce them, revising this approach over time as it is able to reduce more emissions)?
  • Does the company source its offset credits through a project that has been verified in accordance with a recognised voluntary standard or from a United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism (CDM) [or [successor/ equivalent] UNFCCC mechanism], with a view to the offsets being additional, permanent and verifiable?
  • Does the company consider the implications of the offsets purchased on global equity and a “just transition”5 to a low carbon economy?
  • Does the company have any policies in place to reduce the environmental footprint caused by travel/commuting?


  • Does the company assess and disclose climate risks and opportunities with regard to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD)6?
  • Does the company conduct scenario analysis in respect of its operations?
  • Alternatively, has the company performed another form of environmental or climate change risk and opportunity assessment. If not, in relation to the company’s operations, business and supply chain:
    • are there any known or reasonably foreseeable climate change risks?
    • what is the potential impact of extreme climate events (such as floods or drought)?
    • how might current or proposed climate change laws and regulations impact upon the company’s business?
  • What adaptation or resilience measures has the company adopted (or does it proposes to adopt) to mitigate risks of physical climate changes?

Energy efficiency

How is the company measuring and factoring in energy efficiency across their different operations? (For example, office spaces, machinery, third party providers and manufacturing, oil development or electricity generation processes.)

Supply chains

  • Does the company have formal procurement and supply chain climate standards in place that include measuring GHG Emissions, transition risks and physical risks within its supply chain?
  • Does the company consider circular economy principles, origin of resources and/or sustainable or local sourcing within its procurement policies?
  • What environmental obligations are included in the company’s contracts for the supply of goods or services?
  • Are there any [material] contracts which the company considers to be not environmentally friendly (or where a more sustainable option was rejected due to other factors, such as economic factors)? Does the company have any rights of termination or renegotiation in respect of such contracts, for this reason?
  • If the company’s business involves the production and supply of goods, what steps, if any, have been taken to minimise environmental impacts of the company? (For example, to use recycled goods/packaging where possible, to use environmentally friendly production methods, to offset carbon footprints, etc.)
  • If the company’s business is operated online, are customers provided with the option to offset the carbon footprint of delivering the company’s goods or services at the point of sale?

Raw materials

  • What are the company’s primary energy, water and other raw materials sources?
  • Has the company experienced, or does the company anticipate experiencing, any issues associated with sourcing these materials?
  • Does the company maintain records of water use and use of other primary raw materials in the production process?
  • What measures are in place to ensure sustainable water and raw materials use in the production process?
  • What steps does the company take to recycle its waste?
  • Does the company send any of its waste to landfill?


  • Does the company have a specific ESG budget and ESG training programs? Is there an evaluation system or oversight mechanism (KPIs) of ESG concerns mapped against [the UN Sustainable Development Goals [and/or such other applicable assessment standard/ metric]?
  • How are ESG-related matters or monitoring and reporting issues brought to the board’s attention? Is there any specific board member (or committee) that is specifically tasked with ESG-related matters? If so, what are their qualifications?
  • Is the pay, benefits or remuneration of any of the company’s employees, directors or shareholders linked to achievement of any of its climate or sustainability related targets?
  • How is the company integrating climate change and ‘just transition’ factors into decision-making?
  • What board decisions have been taken where climate change or ‘just transition’ factors were:
    • given a higher weighting than other commercial factor; or
    • disregarded in favour of other commercial factors?

Why are these questions important?

It may be that due diligence questions at the above level of detail are not yet being asked in Australia. But they certainly are being asked overseas by investors, lenders and the like, and the world is moving in only one direction. So, be prepared to answer these questions, or some like them, over the next number of years.

In the meantime, see our ESG guide: How to start your ESG Journey – Risks and Opportunities – a practical guide for directors, executives, business owners and in-house counsel.

1 We have drawn these requirements from Frank’s Clause which are draft legal clauses from The Chancery Lane Project. The Project also has a glossary of definitions that can be used.
2 These questions may become conditions on their investment in your company, which might be linked to the level of equity, management might be entitled to on a liquidity event (e.g., stock exchange listing or trade sale).
3 The clauses in this section are drawn from Gordon’s DDQ Clause and Lola & Harry’s DDQ Clause, which are draft legal clauses from The Chancery Lane Project. There are other specific clauses and clauses on other ESG issues which we have not included in this overview.
4 The capitalised terms in this section are defined in Gordon’s DDQ Clause from The Chancery Lane Project.
5 The term ‘just transition’ is often used to refer to a framework for transitioning to a low-carbon economy that equitably distributes the costs and benefits of climate action: About Just Transition and Equitable Climate Action | World Resources Institute (
6 As we reported in our recent ESG guide: How to start your ESG Journey – Risks and Opportunities, there are several international bodies that have been, or are being, established to set standards on sustainability disclosures including the Global Reporting Standards (GRI), the Task Force on Climate Related Financial Disclosures (TCFD) and the proposal in 2021 to establish the International Sustainability Standards Board (ISSB). We encourage you to review these standards to see how they can assist you in reporting your company’s sustainability aims and results.

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