Why Private Equity is Prioritizing ESG in 2025
Introduction
As ESG in public markets continues to be litigated, private equity (PE) firms increasingly use their power to prioritize ESG considerations when evaluating investment opportunities. This trickles down into current and potential private equity investments, affecting current and future portfolio companies. This blog explores why ESG matters for private companies and the forces driving it.
The Growing Demand for ESG in Private Equity
Private equity firms are at the forefront of driving ESG adoption. As investors face increasing pressure from global stakeholders to ensure their portfolios align with sustainable and ethical practices, ESG has become a core criterion in decision-making. 90% of surveyed LPs consider ESG when making investment decisions, and 77% use it as a key criterion when selecting general partners.
Several factors fuel this shift:
Regulatory Changes: Governments worldwide are introducing stricter ESG regulations, and PE firms want to ensure their investments comply. Many outsiders looking into ESG indicate that ESG regulation has been slow in US markets. While this is true, the global nature of business makes this all but irrelevant. Companies, LPs and GPs are interconnected globally and therefore subject to global regulations and expectations.
Market Expectations: Consumers and clients prefer businesses that demonstrate sustainability and ethical governance. A new market expectation is increasingly coming up in B2B markets. Suppliers are pressuring their supply chains to comply with their ESG standards. Companies with B2B relationships with global companies will likely find themselves the recipients of ESG questionnaires and standards.
Risk Mitigation: ESG-aligned companies are less likely to face reputational, environmental, or legal risks. Extreme weather events cost the economy $2 trillion between 2013 and 2023. Experts say this figure is likely to increase as climate change worsens.
For private companies, these factors create a unique situation where ESG alignment is no longer optional but essential to remain competitive and attractive to investors.
“Extreme weather events cost the economy $2 trillion between 2013 and 2023. ”
How ESG Drives Value Creation
Incorporating ESG into business operations does more than satisfy investor requirements; it creates tangible value for companies.
Here’s how:
Operational Efficiencies
ESG initiatives often focus on resource optimization. By reducing energy consumption, minimizing waste, and adopting sustainable supply chains, companies can significantly lower operating costs.
Often, this can also come with the measurement of a few simple key metrics. Companies that begin to evaluate employee turnover or electricity use can directly link cost savings and operational improvements to these metrics. One client saved 60% of their annual natural gas usage through a simple energy audit.
Risk Management
ESG-aligned businesses are better equipped to handle regulatory changes, environmental challenges, and societal expectations, reducing potential disruptions. It can also make a difference in M&A transactions and other private equity transactions. In 80% of cases, material ESG risks reduce valuation and can become a deal-breaker.
“In 80% of cases, material ESG risks reduce valuation and can become a deal-breaker. ”
Climate change is always noted as an ESG risk, but companies integrating ESG understand how strong cybersecurity and governance functions align both with corporate ESG and risk management mandates. According to data referenced by Anne Neuberger, U.S. Deputy National Security Advisor for Cyber and Emerging Technologies, the annual average cost of cybercrime is projected to exceed $23 trillion by 2027, a significant increase from $8.4 trillion in 2022.
Corporate Value Creation
Companies with strong ESG performance build trust among stakeholders, including customers, employees, and investors. Companies that have firmly embedded sustainable management practices can outperform their peers in EBITDA margin by as much as 21%. B2B companies are seeing supplier contracts tied to emissions data and emissions reduction targets. These companies that comply with supplier requests open themselves up to new business opportunities.
Access to Capital
ESG alignment opens doors to green financing and ESG-focused investment funds, providing companies with more funding opportunities. According to MSCI, higher ESG ratings not only align with reduced capital costs but also act as potential signals for future financing conditions. Companies that successfully manage their ESG risks enjoy lower financing costs, making strong ESG performance a key component of corporate strategy.
Access to capital is linked back to the increase of ESG within private equity investing. The statistic above- 90% of surveyed LPs consider ESG when making investment decisions, and 77% use it as a key criterion when selecting general partners- highlights how ESG has become critical for access to capital in private equity.
“90% of surveyed LPs consider ESG when making investment decisions, and 77% use it as a key criterion when selecting general partners.”
Conclusion
The growing emphasis on ESG within private equity-backed organizations is a response to a rapidly changing global landscape where sustainability, risk management, and ethical governance are no longer optional but essential for long-term success. With increasing regulatory pressure, shifting market expectations, and the clear financial benefits of aligning with ESG principles, private equity firms are prioritizing ESG considerations in both investment decisions and portfolio management.
As the demand for ESG-aligned companies continues to rise, those that embrace these practices not only mitigate risks but also unlock new opportunities for value creation, from operational efficiencies to enhanced access to capital. Ultimately, integrating ESG into business strategy is becoming a critical factor in maintaining competitiveness, building trust, and ensuring sustainable growth in an evolving investment environment.
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