The investment landscape is rapidly evolving as Environment, Social and Governance (ESG) become integral to private equity (PE) strategies. ESG considerations are no longer just a check-the-box, risk-mitigation exercise; they are now recognised as key drivers of value creation. A Deloitte US report projects that by 2027, around $1.6 billion in new fundraising will incorporate ESG commitments, highlighting this shift in mindset.

Integrating ESG principles into the core of PE is a complex endeavour. However, developing a holistic ESG strategy and guiding policies helps PE firms make the right investment decisions. Developing a clear long-term value narrative and embedding it throughout the portfolio is crucial.

PE firms are more likely to build a sustainable portfolio and prioritise sustainability in the pre-investment phase through robust ESG due diligence, peer benchmarking, materiality and risk assessments.

Periodic assessments to confirm alignment with international frameworks and relevant regulations can help them navigate compliance reviews and regulatory audits.

The United Nations-supported Principles for Responsible Investment (PRI) plays a crucial role in this transition, helping investors integrate ESG principles in the investment process to create sustainable markets and improve returns. In 2021, about 75 per cent of PE investors used materiality assessments, and most PE signatories use ESG factors in pre-investment processes to identify risks. Nearly 96 per cent of corporate and PE investors expect that over the next three years there will be a greater focus on ESG issues in business agreements as the dynamics of business transactions evolve.

New York University researched and analysed over a thousand studies on ESG, and 58 per cent highlighted a positive relationship between ESG and financial performance. Furthermore, PE’s business model can enhance the implementation of the sustainability agenda, provide new opportunities and alter the legacy of businesses as they have some degree of ownership and governance control. Early adoption of ESG has indicated early mover advantages, leading to improved valuations and higher returns.

Investment trends

PE firms are increasingly investing in renewable energy, decarbonisation and circular economy. These investments are driven by climate change mitigation efforts and the need to reduce emissions from energy-intensive operations.

Top PE firms with the highest assets under management (AUM) are focusing on the energy transition, such as renewable energy, transition fuels and electric grid infrastructure. By 2030, about $4.5 trillion per year will be required for the energy transition, with private capital expected to finance 40 per cent.

According to S&P Global Market Intelligence Data, PE and venture capital transactions in the global renewable energy sector reached $14.58 billion in the last five years. There has been a 25-fold increase in funds raised for renewable energy compared with fossil fuel fundraising.

As the global economy shifts towards sustainability, PE investors can enhance business outcomes for stakeholders. PE firms must develop a clear long-term value narrative and embed it across their portfolio to achieve this. This means proactively creating shared value with society and not just responding to regulations. Effective ESG integration requires a top-down approach, embedding sustainability across the investment life cycle. By articulating the commercial value of ESG and focusing on measurable outcomes, PE firms can boost investment performance, seize new opportunities and lead the transition to a sustainable economy.

Berry is President, Strategy, Risk and Transactions, Deloitte South Asia, and Tyagi is Partner, Climate Change and Sustainability, Deloitte India