ESG increasingly influential in private equity

Shifting landscape

The numbers tell a striking story – 55 dedicated ESG funds launched in early 2023, but only six in the latter half ^[1]. Yet this apparent pullback hides a more significant shift. Instead of standalone products, firms are weaving environmental, social and governance considerations into their core investment approach. It's a more pragmatic strategy that balances sustainability with the essential focus on returns.

Key drivers

Regulations are certainly pushing things forward, with financial markets worldwide demanding better ESG disclosure and climate risk assessment ^[2]. Beyond regulatory pressure, there's another powerful force working in ESG's favour: investors themselves. Limited partners – especially pension funds and sovereign wealth funds – are becoming increasingly vocal about ESG expectations. Many have their own net-zero commitments and want their investment partners to follow suit ^[3]. They're asking tougher questions before committing capital.

However, Trump's return to the White House has cast a shadow over some initiatives – the US has withdrawn from the Paris Agreement again, and funding for green projects under the Inflation Reduction Act has been frozen ^[4].

Business advantages

The truth is, a solid ESG approach is proving to be good business. Firms with robust frameworks and measurable improvements are finding it easier to raise funds in a competitive market. It's not just about keeping investors happy either – effective ESG management is delivering real financial benefits through better operations, fewer regulatory headaches, and more resilient businesses.

Current challenges

The changing political landscape is creating some tactical adjustments. The legal environment has become more complex, with eleven Republican-led states challenging major asset managers over climate activism last November ^[5]. Some firms are recalibrating their public positioning - BlackRock's departure from the UN-backed Net Zero Asset Managers initiative in January 2025 ^[3] and major US banks leaving similar climate alliances reflect a more cautious approach to public ESG commitments rather than abandoning the underlying practices ^[6].

Despite these political shifts in Washington, most industry veterans believe ESG is here to stay. Private equity's global nature means firms must still address stringent requirements elsewhere, particularly in Europe, even if US regulations ease up ^[7]. The momentum has shifted from being primarily regulatory-driven to market-driven.

Future outlook

Looking ahead, we'll see evolution rather than revolution. The focus will sharpen on better data collection, more precise climate impact measurement, greater attention to social factors like diversity, and clearer reporting frameworks designed specifically for private markets.

The headline might suggest ESG is losing steam, but the opposite is true. It's becoming embedded in how private equity does business – a sign that the industry recognises the real financial impact of sustainability factors. For PE firms today, robust ESG capabilities aren't just nice to have; they're essential for attracting capital, building stronger portfolios, and achieving successful exits.

Sources

1. https://www.ft.com/content/6656d077-7e9f-4f5a-b753-3c91379194d8
2. https://www.reuters.com/sustainability/sustainable-finance-reporting/investor-climate-group-suspends-activities-after-blackrock-exit-2025-01-13/
3. https://www.reuters.com/sustainability/blackrock-quits-climate-group-wall-streets-latest-environmental-step-back-2025-01-09/
4. https://www.morganlewis.com/pubs/2025/01/federal-agencies-ordered-to-pause-spending-of-inflation-reduction-act-infrastructure-investment-and-jobs-act-funds
5. https://www.reuters.com/legal/blackrock-state-street-vanguard-sued-by-republican-states-over-climate-accords-2024-11-27/
6. https://www.theguardian.com/business/2025/jan/08/us-banks-quit-net-zero-alliance-before-trump-inauguration
7. https://www.ft.com/content/e2bc352b-aa8c-41fc-87b4-b61b676cfcbf