As we settle into 2025, Environmental, Social, and Governance (ESG) within the private equity sector is facing significant shifts and headwinds, influenced by political, regulatory, and market dynamics. Despite the strong growth and institutionalisation of ESG within funds over the last decade, this may be losing steam in some areas. ESG terminology and focus has become contentious and in certain cases misaligned, leading some firms to rebrand or refine their sustainability efforts. Here, Belén Satorre, Associate Director, ESG, reflects on key evolving trends in ESG within the private equity sector, regulatory challenges, and strategic approaches to consider how it can continue to be a vehicle for tangible value creation.
Regional differences in ESG adoption
In the EU, general partners (GPs) are still leading the way with high levels of awareness and commitment to sustainability, driven by high expectations by institutional investors and regulators. The EU's regulatory framework, first the Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy and now the Corporate Sustainability Reporting Directive (CSRD), has pushed GPs to adopt ever more rigorous ESG standards for both themselves and their portfolios. However, the extensive regulatory demands are creating challenges, particularly for smaller portfolio companies struggling with data collection and compliance burdens. Calls for Omnibus regulation to streamline compliance and reduce duplication are growing, but there are concerns about EU credibility in this process. There is also no consensus on next steps. A group of NGOs, for example, coordinated by WWF and including ClientEarth, Milieudefensie, ShareAction and BankTrack, issued a joint statement urging EU policymakers to focus on the implementation of the CSRD rather than deregulation measures.
In contrast, US GPs are more hesitant than ever, particularly those sitting in red states. Political pressures surrounding ESG intensified in the recent US presidential election. With growing opposition to ESG, particularly ESG investments themselves, from various political groups, many companies and GPs are facing increased scrutiny around the demonstrable value of ESG. The anti-ESG movement has led to more GPs and their portfolio companies reconsidering their public commitment to sustainability to avoid political backlash or criticism, even if in many cases they continue to pursue it for their limited partners (LPs).
The anti-ESG movement has led to more [general partners] and their portfolio companies reconsidering their public commitment to sustainability”
This trend is expected to persist throughout 2025. In fact South Pole's Net Zero Report 2023/2024 highlighted that while earlier ESG efforts were often criticised for greenwashing, the current trend of greenhushing (deliberately downplaying ESG achievements) is rising with 58% of corporates reducing their ESG communications as a result. When looking across regions, reportedly 80% of businesses in Sweden and 72% in France rank among the highest of those finding it increasingly difficult to communicate their net zero goals. They were also among the regions where companies were greenhushing and decreasing their external communications to the greatest extent, with 79% of Swedish companies and 82% of French companies admitting to doing so.
With different regulatory standards and divergent approaches in ESG practices across different geographies, influenced by regional political dynamics, GPs will face a real challenge in 2025. This is particularly problematic for GPs with different locations of domicile, portfolios in multiple regions, or multiple LPs based in different geographies, where ESG strategies will need to meet both global and local expectations.
With different regulatory standards and divergent approaches in ESG practices across different geographies, influenced by regional political dynamics, GPs will face a real challenge in 2025.”
Navigating ESG uncertainty across portfolio companies
One of the biggest crunch points for GPs is how to translate the myriad of often complex requirements and evolving regional trends into a strategy that works for all their portfolio companies. So, what key initiatives can GPs undertake to support their portfolio companies?
- Data-driven approach: A key approach to improving ESG performance is to emphasise value creation rather than merely striving to meet regulatory requirements. GPs should prioritise the quality of data over its quantity, ensuring the information gathered is relevant and closely aligned with investment strategies. For portfolio companies undergoing a double materiality assessment as part of CSRD compliance, focusing on 3-4 key material areas for reporting is advisable. This prevents companies from becoming overburdened and disillusioned by compliance demands, allowing them to concentrate on actionable data that delivers meaningful and measurable outcomes.
- Supporting ESG knowledge-sharing at the portfolio level: Already many GPs actively work with portfolio companies to integrate ESG strategies into their operations by facilitating knowledge-sharing sessions on ESG best practices to help companies meet regional mandates like board diversity requirements and double materiality assessments to assess both financial and non-financial risks. This may take the form of webinars or ‘portfolio days’ where key people are in the room together. But evidence from these day suggests there is often limited engagement, attendees are juggling too many other responsibilities and there is not sufficient follow-up. GPs will need to think carefully on who attends these sessions, to ensure engagement is maximised, and have clear follow-on action from them for each portfolio company.
- Leadership and governance: Appointing Chief Sustainability Officers (CSOs) or similar roles at the portfolio level can be costly, but consideration needs to be placed on who is really qualified or able to do the job internally otherwise. Having a dedicated ESG role or team drives accountability, aligning sustainability goals with operational and financial targets, and ensuring that value creation and ESG outcomes are intertwined. Consider whether hiring fractional and temporary ESG support in could be viable, providing a short-term injection to get the right type of ESG programme off the ground.
Having a dedicated ESG role or team drives accountability, aligning sustainability goals with operational and financial targets, and ensuring that value creation and ESG outcomes are intertwined.”
What to expect: Key ESG themes
- The rising importance of the ‘G’ of ESG: According to the annual 2024 ESG Attitudes Tracker from the Association of Investment Companies (AIC), transparency and disclosure is now rated the number one ESG issue, with 60% of respondents considering it important to consider when investing - higher than in any previous year. We certainly see this in our work with GPs, whereby getting that overarching ESG framework in place matters almost as much as what goes in it.
- ESG communication strategies: As (some) governments, regulators, and investors push for more comprehensive ESG disclosures, ESG communication strategies will be crucial. GPs and their portfolio companies must not only meet regulatory standards but also communicate their progress in a nuanced way that resonates with all stakeholders, especially in a politically volatile environment.
- Impact investing: There will be an increasing emphasis on impact investing, with firms seeking investments that generate measurable social and environmental benefits alongside financial returns. This approach aligns with a broader commitment to responsible investing and addresses growing investor demand for purpose-driven portfolios. Impact investing is expected to really focus in on certain sectors, particularly healthcare where it intersects with environmental sustainability and innovation.
- Net-zero emissions: The journey to net-zero emissions will remain central to ESG strategies for 2025, particularly in private markets. Yet, challenges persist, such as the lack of a unified methodology to screen portfolios for climate solutions and more robust implementation efforts needed to successfully transition to net zero, including a wider adoption of the Science-Based Targets initiative (SBTi).
- Biodiversity: Biodiversity is gaining prominence as a key investment theme, with GPs exploring opportunities in sustainable agriculture, reforestation, and other nature-based solutions. This trend reflects a broader recognition of the critical role that biodiversity plays in long-term economic stability and environmental health.
Conclusion
The challenges of greenhushing, regional disparities, and regulatory pressures make it clear that the ESG journey is far from complete, or straightforward. In 2025 and beyond, ESG will need to adapt to become more than a box-ticking compliance exercise, and prove that, if implemented correctly, can become a catalyst for transformative change and financial gain. By prioritising actionable insights, driving collaboration, and empowering portfolio companies to lead on sustainability, the industry can prove that ESG is not just ethical – it’s essential for long-term value creation.