ESG in Private Equity: Take The Lead in Sustainability

ESG in private equity involves business leaders and investors integrating environmental, social, and governance (ESG) factors into investment decision-making and ownership practices. This is increasingly expected from private equity firms, with investors and industries looking to firms to lead the way in responsible and sustainable investing.

We’re going to examine ESG not just as a duty in the private equity space, but also how it can impact value creation, investor expectations, and long-term business outcomes. This article also takes a global perspective, considering various sectors and markets, rather than being limited to a single jurisdiction.

What Is ESG in Private Equity?

ESG stands for Environmental, Social, and Governance. These categories are increasingly considered vital in business, and focusing on them as part of private equity practices presents differences to traditional financial-only investing. It involves firms, managers, and investors systematically assessing how potential investments align with high sustainability and ethics watermarks before engaging, sometimes prioritizing these elements over easy returns.

This is particularly pertinent for PE firms, as success relies on raising the value of acquired portfolio companies, which requires engagement from increasingly environmentally and socially active stakeholders. Maintaining high standards can affect employee buy-in, customer retention, and even compliance that boosts credibility.

ESG Investing Private Equity: Key Drivers

There are various drivers influencing the rise of ESG investing in private equity. Firstly, institutional investors and limited partners (LPs) recognize the ethical and strategic advantages and are demanding firms prioritize it. Indeed, greater public and stakeholder scrutiny is adding to the pressure to meet high standards. Additionally, regulatory changes in recent years are seeing sustainability disclosures becoming central to compliance, which solid ESG protocols support. The potential to safeguard value in the long term and mitigate risks through governance measures is also a driver, given rising prioritization of responsible investment deployment.

ESG Investment Private Equity Practices

Some of the common approaches include:

• Due diligence – PE firms perform pre-investment due diligence into prospects, assessing the environmental risks, labor practices, and current governance structures. This avoids problematic investments and integration issues. 
• ESG integration – After acquisition, the PE firm will make ESG considerations a core agenda. It will make operational changes, adopt transparent reporting systems, and align the company culture.
• Exit considerations – Firms make or highlight improvements that can enhance valuation at the point of sale or when arranging private equity secondaries. This may include increased energy efficiency, boosted governance transparency, and community engagement.

Environmental Considerations in Private Equity

Environmental considerations for PE firms begin with continuous evaluation of carbon footprint and energy efficiency within individual portfolio companies and across the wider portfolio. In particular, tracking emissions, identifying excesses in resource use, and monitoring waste management practices. There can also be industry-specific environmental risks firms must be mindful of, with manufacturing companies that interact with physical products experiencing different issues to purely digital services. Private equity roll-up entities will also need to consider footprints across multiple small firms.

Social Factors in ESG Investing Private Equity

PE firms’ social performance considerations begin with portfolio companies’ workforces; strengthening employee welfare practices, encouraging greater diversity, and establishing labor rights safeguards. They also promote community engagement among their investments, identifying opportunities to meaningfully engage with locals through initiatives and enhancing local economic impact. Furthermore, raising customer safety standards and supply chain transparency demonstrates social responsibility, attracting both consumers and talent.

Governance Factors in Private Equity ESG Investing

Governance is largely focused on maintaining ethics and regulatory compliance. This begins with ensuring that portfolio companies’ board structures are composed of diverse, experienced, and trustworthy figures. There should also be transparency in decision-making, clear accountability measures, and executive compensation schemes aligned to performance. PE firms should also collaborate with private equity lawyer services to assess anti-corruption policies and legal compliance protocols in acquisitions, ensuring alignment with jurisdictional and international frameworks—such as FATF recommendations— and making improvements. Importantly, transparent regulatory reporting and ESG data governance maintain accountability and safeguard stakeholder interests.

ESG Metrics and Reporting Frameworks

PE firms typically refer to established reporting frameworks, such as the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), and Task Force on Climate-related Financial Disclosures (TCFD). These guidelines standardize ESG monitoring, ensuring issues are quickly and correctly identified. Firms will also often adopt tailored key performance indicators (KPIs) and materiality assessments that monitor progress related to specific goals or industry nuances.

There are some persistent challenges here. Data consistency and the subjective nature of materiality assessments can make comparing performance across portfolios more complex. Standardization is also difficult when each portfolio company has its own frameworks and priorities.

ESG as a Value Creation Lever

ESG can drive operational value. For instance, scientific firm Thermo Fisher’s commitment to ESG since 2021 continues to enhance operational efficiency alongside maintaining high compliance standards and strong returns for shareholders. ESG also contributes to enhancing brand reputation, reflecting consumers’ and investors’ growing focus on environmental and social responsibility.

In some instances, it can open up market access, unlocking strategic partnerships that expand reach. Importantly, it provides value as a risk reduction tool; mitigating regulatory, environmental, and social hurdles. This reduces disruption and helps make portfolios more resilient.

Integrating ESG Into the Investment Lifecycle

Effectively embedding ESG starts with screening potential acquisitions. Firms utilize scoring methodologies that identify current areas of alignment with standards and areas of risk. This then informs the deal process, with PE firms codifying standards in shareholder agreements, making commitments clear and enforceable. Furthermore, it’s vital to monitor performance throughout the holding period, using a combination of real-time data analytics dashboards, internal and external audits, and workforce feedback systems.

Challenges in ESG Implementation

One persistent challenge of implementation is that ESG data collection inconsistencies—particularly across portfolio companies spanning multiple industries and jurisdictions—can disrupt informed decision-making and compliance. Additionally, some management teams resist initiatives, either due to unfamiliarity or cultural mismatch. This, alongside legacy structures with outdated infrastructure, can complicate integration efforts. Finally, balancing the investment required to achieve high standards with near-term financial goals requires careful planning and clear stakeholder communication.

Global Trends in ESG and Private Equity

ESG regulation is growing across the world, with the E.U. is taking a leading role and adopting a rating system to ensure consistency. In the U.S., standards and reporting rules are set by multiple bodies, such as the Securities and Exchange Commission (SEC) for transparency and financial disclosures, and the Environmental Protection Agency (EPA) for sustainability standards. Similarly, Asia’s focus is growing, with reporting standards varying on a country-by-country basis, though most adhere to TCFD guidelines. Despite these regional differences, alignment among global PE investors is prompting more harmonized commitment to sustainability.

The Future of ESG in Private Equity

Looking ahead, the future is likely to involve deeper regulation, with anticipated developments related to more rigorous reporting and tighter environmental standards. Additionally, there’s increasing emphasis on biodiversity and ecosystem restoration in business practices, alongside making supply chain decisions that are ethical and sustainable. Diversity, equity, and inclusivity (DEI) is also growing in prominence for PE firms, both for social responsibility and strategic advantages. Furthermore, technology such as Artificial Intelligence (AI) and data analytics platforms continue to develop and are likely to inform real-time ESG risk monitoring and more precise reporting.

FAQs

What is ESG in private equity?

It is the application of environmental, social, and governance principles throughout investment processes in private equity transactions.

Why is ESG important for private equity firms?

ESG helps firms to meet investor expectations, reduce risks, enhance returns, and prepare for both regulatory and market shifts.

How is ESG evaluated in private equity deals?

Through ESG due diligence, ongoing portfolio monitoring, and third-party reporting frameworks tailored to sector-specific risks.

Does ESG hurt financial performance?

No, well-implemented ESG practices often correlate with better risk-adjusted returns and long-term portfolio stability.

Are there global standards for ESG reporting in private equity?

There are no global standards, but firms use common frameworks such as SASB, GRI, and TCFD as a baseline.

References

SASB. (2025). SASB Standards overview. SASB. https://sasb.ifrs.org/standards/ 

Thermo Fisher Scientific. (2023). 2023 Corporate Social Responsibility Report. Thermo Fisher Scientific. https://corporate.thermofisher.com/content/dam/tfcorpsite/documents/corporate-social-responsibility/annual-reports/2023-CSR-Report.pdf
European Council. (2025, February 3). Environmental, social and governance (ESG) ratings: Council greenlights new regulation. European Council. https://www.consilium.europa.eu/en/press/press-releases/2024/11/19/environmental-social-and-governance-esg-ratings-council-greenlights-new-regulation/