Navigating the Evolving ESG Landscape
4 Key Trends Shaping Private Equity in 2025
27th January 2025
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The private equity (PE) landscape is rapidly transforming, driven by increasing investor and regulatory focus on Environmental, Social, and Governance (ESG) factors. As we look ahead to 2025, four key trends are set to redefine how PE firms approach ESG integration and value creation.
1. Heightened Regulatory Pressure: CSRD and Beyond
The momentum around ESG data management continues to build, driven by regulations like the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).
Whilst these directives primarily impact EU-based businesses – from 2025, large, listed EU companies are obligated under CSRD, and large EU companies will be collecting data ahead of reporting in 2026 – the implications are also trickling through global supply chains. As a result, PE firms increasingly expect non-EU based portfolio companies to comply with these standards to demonstrate ESG best practice.
The CSDDD fundamentally shifts the emphasis from reporting to due diligence, introducing significant complexities and responsibilities for companies—and their investors.
This continued momentum means GPs need to consider:
- Expanded Due Diligence. ESG assessments must now encompass a comprehensive view of sustainability risks and impacts across the entire value chain, including human rights considerations.
- Robust Data Management. PE firms require sophisticated systems to collect, verify, and analyse data from diverse sources for both mandatory and voluntary disclosures (such as eDCI and PRI). These systems should also enable portfolio benchmarking visualisation.
- Integrated Sustainability Decisions. ESG factors must be fully integrated into investment decisions. The responsibility of understanding lies with both the ESG and the investment team.
- Enhanced Portfolio Engagement. PE firms must actively support portfolio companies in meeting and going beyond evolving ESG requirements to realise value creation opportunities.
The growing availability of high-quality data will increase the opportunity for benchmarking across portfolios and sectors, enabling more targeted action to drive value creation. These regulations and double materiality assessments establish clear guidelines on the ESG information vendors must convey and buyers should look for when considering new investments – further details below.
2. Increased Focus on ESG as a Driver of Value Creation
ESG in PE continues to evolve from a purely compliance-driven exercise to a critical lever for financial performance. As data management processes become optimised, we expect to see an increase in value creation activity like ESG-linked product and service innovation.
Vendor due diligence (VDD) is emerging as a key tool to highlight the financial materiality of ESG initiatives, particularly in areas like decarbonisation. This involves demonstrating the direct link between sustainable practices, such as cost savings from energy efficiency improvements, to enhanced financial returns, increased valuations, and enhanced access to capital from ESG-focused investors. VDD reports enable sellers to realise a premium for strong ESG performance at exit, reassuring buyers with a low-risk, future-proof investment.
ESG VDD proactively addresses questions a buyer may have about a target’s ESG performance, risk exposure and overall alignment to their investment strategy. Evolving regulations, such as the UK’s Sustainable Disclosure Requirements and the EU’s Sustainable Finance Disclosure Requirements, Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive, have helped increase awareness of the risks associated with regulatory non-compliance.
Alongside the data imperative, creating a narrative and storytelling are just as important. We expect to see an increased focus on external value creation narratives and exit stories demonstrating the commercial value of sustainability initiatives in ESG and impact reports.
3. Decarbonisation: Turning Targets to Action
While many PE firms have already set ambitious decarbonisation targets through frameworks like the Science Based Targets initiative (SBTi), translating these targets into tangible, actionable strategies remains a significant challenge that many GPs are now turning their attention to. Growing scrutiny around GHG inventories and the costs associated with meeting SBTs is increasing the need for robust decarbonisation planning for the acquisition phase.
The responsibility goes beyond the ESG team, and it is important for deal teams to be upskilled in this area. For investment managers, the key lies in understanding the financial implications of decarbonisation at every stage of the investment cycle, soon to be a requirement under CSDDD once the Directive is transposed to member states by July 2026.
Key elements of a successful approach to decarbonisation include:
- Conducting targeted ESG due diligence to identify material risks and opportunities relating to decarbonisation.
- Supporting the integration of decarbonisation initiatives throughout the ownership phase including portfolio company target setting.
- Showcasing the strengthened ESG profile of portfolio companies to prospective buyers relating to decarbonisation progress and potential, maximising valuations at exit.
4. The Nature Imperative
Biodiversity loss, driven by human activity and climate change, is emerging as a critical business risk, with approximately half of the world’s GDP ($44 trillion) moderately or highly dependent on nature. An increasing awareness of companies’ impacts and dependencies on nature, and transparency/reporting requirements, such as the Taskforce on Nature-related Financial Disclosures (TNFD) and the Corporate Sustainability Reporting Directive (CSRD), are pushing investors and other stakeholders to consider nature.
What to expect from PE firms in 2025:
- Nature due diligence. Integrating biodiversity into decision-making through including nature and biodiversity screening in due diligence processes.
- Double Materiality Assessments: Identifying nature-related impacts, risks and opportunities through double materiality assessments, driven by the next CSRD reporting thresholds.
- Mitigation Strategies: Developing nature strategies, KPIs and initiatives, including biodiversity credits.
As of October 2024, over 500 organisations, managing $17.7 trillion in assets are committed to TNFD-aligned risk management and corporate reporting. Leading PE firms are committing to aligning reporting to TNFD from 2025 and integrating biodiversity into all stages of the investment cycle (including due diligence).
What is the TNFD?
The TNFD is a global initiative with recommendations and guidance that provide organisations with a risk management and disclosure framework for nature-related dependencies, impacts, risks and opportunities, with the aim to shift financial support away from nature-negative activities, towards nature-positive ones. It uses the same four pillars as the Taskforce on Climate-related Financial Disclosures (TCFD), being Governance, Strategy, Risk & Impact Management, and Metrics & Targets.
Conclusion
2025 will be a pivotal year for ESG in PE. Firms must adopt a proactive, data-driven approach to decarbonisation and ESG management, integrating sustainability into every aspect of the investment lifecycle, from due diligence to exit.
Anthesis provides the necessary expertise, tools, and data-rich methodology to help PE firms not only meet ambitious ESG goals but also significantly enhance financial performance and unlock substantial long-term value. We are uniquely positioned to be your strategic partner and thought leader in this transformative journey, supported by a strong suite of digital products.
Explore our services:
- ESG, Decarbonisation and Vendor Due Diligence: Supporting you throughout the responsible investment lifecycle.
- Nature Support: Connect with our integrated nature and PE expert teams.
- CSRD Compliance: Navigate Reporting Requirements with Confidence.
- ESG Data Management Platform (MERO): Simplify and optimise ESG reporting.
We are the world’s leading purpose driven, digitally enabled, science-based activator. And always welcome inquiries and partnerships to drive positive change together.
