ESG in Private Equity: A Lever for Value Creation (Not Just Reporting)
In Private Equity (PE), ESG is often considered a compliance issue. It’s seen as reporting, box-ticking, and more of a burden than a benefit. We’d like to challenge this mindset by demonstrating that when implemented correctly, ESG can be a powerful asset for both your PE firm and your portfolio companies.
ESG Not a Priority? Think Again
If you think ESG (Environmental, Social, and Governance) is just a regulatory box-ticking exercise, it’s time to reconsider. ESG is a powerful tool for creating value across your portfolio and a key factor in ensuring a strong exit.
In 2024, mid-market private equity (PE) deal volumes in the UK rose to their highest level in over three years, with total deal values rising nearly 12% compared to 2023. A recent study by Investec revealed that 65% of mid-market firms backed by PE investors believe strong ESG performance makes them more attractive to acquirers.
This isn’t just about ESG-focused funds —it’s relevant to every PE firm and portfolio company. In today’s challenging economy, where debt is expensive, and M&A activity faces capital constraints, PE firms increasingly turn to transformation programs and ESG integration as critical levers for value creation.
Value Creation with ESG: What Are the Drivers?
ESG performance can unlock new markets, attract customers, and build long-term resilience. Many firms are conducting ESG maturity assessments and embedding material ESG factors into their strategies and operations. This isn’t just about compliance; it’s about scaling profitably while improving reputation and operational efficiency.
Here’s how PE firms are using ESG to drive value:
Market Access: A robust ESG plan is now a must-have for procurement in the public sector and B2B markets. Without it, sales opportunities are limited.
Talent Pipeline: A credible ESG strategy helps attract and retain top talent, which is critical for growth, especially in lean teams.Operational Efficiencies: Better environmental sustainability practices lead to cost savings, improved efficiency, and better profitability.
Customer Diversification: Meeting customer expectations on ESG unlocks new sales channels and expands your customer base, opening up new markets and opportunities.
Raising Capital: Limited Partners (LPs) now expect private equity firms to integrate ESG considerations into their investment process, from due diligence to exit. The shift is driven by the recognition that sustainable strategies correlate with resilience and don't require a trade-off on returns.
The Financial Impact of ESG in Action
Real-world proof that ESG drives value:
Unilever’s Sustainable Living Brands grew 69% faster than the rest of its portfolio, demonstrating how sustainability-driven growth boosts market valuation
EQT’s Robotics Investment: One portfolio company retooled its strategy around sustainability, resulting in a 4.5x EBITDA increase and doubled employment during ownership.
Making Sure You’re Exit-Ready
When it comes to exit strategy, ESG performance is critical. Get it right, and it will positively impact valuation multiples.
Businesses without robust ESG reporting may find certain IPO routes closed off. Strong ESG performance ensures readiness for exit by satisfying investor expectations and regulatory demands.
Net zero commitments aren’t a grand gesture about solving climate change alone—they’re about risk management. Businesses that ignore climate risks could see their valuations suffer, while those that incorporate ESG strategically position themselves for stronger exits.
Consider this: Research shows that companies improving their ESG scores by just 10 points can increase their EV/EBITDA multiple by up to 1.8x, demonstrating how robust ESG strategies directly translate into financial upside at exit.
How to Integrate ESG into Your Strategy
Integrating ESG doesn’t mean doing everything—it means doing the right things well. Start by identifying what’s material to your business:
Assess Your Position: Understand where you are now, where you need to be, and the gaps in between.
Create a Roadmap: Prioritise tasks based on this assessment to save time and resources.
Communicate with Integrity: Be transparent about your ESG progress—even if you don’t have all the solutions yet. Transparency builds trust.
This upfront planning builds confidence among stakeholders while ensuring your efforts align with long-term goals.
How Regulation Matters
A significant portion of UK PE funds rely on institutional investors like pension funds, sovereign wealth funds, insurance companies, and asset managers, organisations that are increasingly feeling the pinch of ESG regulations. A strong performance on ESG factors has, therefore, become non-negotiable for PE firms looking to align with investor expectations and their regulatory requirements.
Conclusion: Could ESG be Your Greatest Ally?
ESG is a label or framework designed to help your firm to measure sustainability and from what we’ve seen, it’s a game-changer for private equity firms looking to create enduring value.
From gaining access to new markets and attracting top talent to ensuring exit readiness and resilience, integrating ESG principles is no longer optional—it’s essential.
Real-world success stories prove that strong ESG performance drives higher exit valuations while future-proofing businesses against emerging risks. By embracing this approach now, PE firms can position themselves as leaders in sustainable value creation while avoiding the pitfalls of being left behind.