Key Impact Points:
- Investor Pressure Rises: 85% of limited partners (LPs) expect to increase their focus on sustainability in the next three years, pushing private equity (PE) firms to prioritize ESG goals.
- Slow Progress Toward Net Zero: Only 22% of PE-owned companies have a decarbonization strategy, but those that do are reducing emissions faster than public companies.
- Gender Diversity Advancing: 77% of PE-backed companies now have at least one woman in the C-suite, compared to 64% of public companies.
The private equity (PE) industry is steadily advancing its sustainability efforts, driven by increasing investor expectations and the commercial benefits tied to ESG initiatives. With over $8.7 trillion in assets under management, PE firms are leveraging their influence to integrate sustainability into their investment strategies.
According to Boston Consulting Group’s (BCG) second annual Sustainability in Private Equity report, 85% of limited partners (LPs) plan to prioritize sustainability even more in the next three years. These expectations have pushed both general partners (GPs) and portfolio companies to adopt stronger sustainability frameworks.
“The private equity industry has demonstrated how to advance sustainability in a way that creates value, and the sector is just getting started,” said Vinay Shandal, BCG’s global head of sustainable investing and a coauthor of the report. “Private equity, with its long-term investment horizons, sophisticated owners and influence, creates the ideal context to drive these initiatives.”
Challenges in Reaching Net Zero
Despite progress, the road to net zero remains challenging. The report found that only 22% of PE-owned companies have a decarbonization strategy, a number that falls short compared to 29% in public companies. However, private firms with such strategies are cutting emissions at a faster rate than their public counterparts.
In the adoption of renewable energy, private companies increased usage from 28% to 30% in 2023, signaling growing momentum. Regional disparities remain stark, with European private firms leading in renewables, while North American firms still lag significantly.
Investor Expectations and Commercial Benefits
The growing focus on sustainability is driven by LPs who view sustainable companies as more valuable. A recent survey revealed that 70% of LPs believe that companies managing sustainability well will command a valuation premium. Additionally, 40% of LPs have set aside dedicated funds for climate investing.
“As sustainability initiatives within the industry continue to mature, better data collection and transparency will enable valuable insights for allocators, managers and portfolio companies alike,” said Ben Morley, a partner and associate director at BCG and coauthor of the report. “We see clearly in the data that the private equity industry has an important role to play in driving positive change and transforming sustainability into a competitive advantage for private equity and the companies in which the sector invests.”
Diversity and Job Creation Improvements
The PE sector is also making progress on gender diversity and job creation. Currently, 77% of PE-backed firms have at least one woman in the C-suite, outpacing public companies at 64%. However, the report notes that board-level diversity remains a challenge, with only 61% of private companies having women on their boards, compared to 89% of public firms.
Despite economic headwinds, job creation at PE-owned firms continues, with these companies generating four net new hires per 100 employees, compared to just one at public firms.
Looking ahead, PE firms are expected to continue integrating sustainability into their portfolios as they seek to meet rising investor demands while reaping the commercial benefits of sustainable growth.
Download each of the three articles that make up the report here: