Sustainability in Private Equity is 70% Hype
And how to find the 30% that are no B.S.
In October 2024, an analysis revealed that major private equity firms, including industry giants like EIG and the Carlyle Group, have been channeling substantial investments into fossil fuel projects. Despite public declarations of sustainability, these firms collectively finance ventures emitting over a billion tons of greenhouse gases annually.
Collectively, these firms have invested more than one trillion dollars into the energy sector. The majority of these investments went to fossils and not into renewables.
This is a stark contradiction, given how loudly many private equity (PE) firms tout their sustainability-related commitments. Just 21 private equity firms emit more carbon through their fossil energy investments than all the flights across the globe. That is almost four times the emissions from powering all houses in the U.S., or five times the U.S. military-industrial complex during times of conflict.
There is, of course, nuance to the picture. Some PE firms are indeed pioneers in sustainable investment. Many others, however, don’t walk their talk. I’d go as far as saying that they’re walking in the opposite direction that they’re talking about!
EIG Global Energy Partners, for example, has chosen to have 82% of its energy portfolio made up of fossil fuel companies, resulting in an estimated 271.8 million tons of emissions that contribute to climate change. Why would PE firms like EIG continue to finance such damage?
A survey by PwC indicates that only 32% of PE funds had sustainability influencing the majority of their investments. This means that close to 70 percent funds do not prioritize sustainability in their investments, despite all the claims they make.
The reasons for this are in reality quite nuanced and go well beyond “because it makes money.” We’ll get into all that below. We’ll also cover how to spot the few firms that actually do substantial good. We’ll then identify areas in which even pioneers still have improvements to make. Finally, we’ll talk about what investors should demand of PE firms, and what the future holds for sustainability in private equity.
Reasons for Sustainability-Related B.S.
There are several reasons why many PE firms behave the way they do:
They see sustainability-related commitments as a useful marketing tool, and believe that this is all they need to do.
They tick the boxes required by legislators in form without truly following the essence of the law, because they believe that this is the most cost-efficient way of doing business.
They do not understand that sustainability is a key driver of value creation and an important tool for risk management.
We’ll look at these drivers in more detail below, and cover a few examples of bad behavior and its reasons.
Sustainability as PR
Greenwashing is rampant in PE. The sector is under much less scrutiny than public investment vehicles and asset managers. As a result, they can get away with claiming green stuff while doing brown things.
A study examining the top 100 U.S. private equity firms revealed that 58% provided no substantive information about their Environmental, Social, and Governance (ESG) practices, despite promoting sustainability narratives. This suggests that many firms prioritize image over action. For a great many PE firms, sustainability claims are a marketing tool rather than a framework for genuine progress.
The goal of PE firms is to buy firms at a low price, make them more efficient, and sell them in 3-5 years for a substantial profit. A bias towards green but unsubstantiated claims can particularly arise during fundraising, because many PE funds focus too much on crafting the right narrative to get money from pension funds and other limited partners, rather than working on making that narrative a reality with their portfolio companies.
Sustainability as Compliance
For some PE firms, sustainability efforts are driven by regulatory requirements rather than a commitment to ethical practices. These firms often adopt a minimalist approach to sustainability. They’ll be doing just enough to meet legislative mandates without integrating sustainability into their core operations.
A 2024 research paper highlighted that 71% of private equity firms are signatories to ESG initiatives that are easy to implement and subject to lower accountability. This indicates a tendency to engage in superficial compliance, focusing on form over substance.
Moreover, the lack of standardized ESG reporting and expertise within firms can lead to ineffective implementation. A survey found that 45% of private equity firms cited high costs and a shortage of skilled personnel as significant challenges in integrating ESG data. This challenge and personnel shortage is real. Sadly, many PE firms are resorting to making life easy by reducing the challenge to a box-ticking exercise rather than meaningful action.
Sustainability and Value Creation
Integrating ESG factors can unlock significant value and mitigate risks. Firms that proactively embrace sustainability often discover opportunities for innovation, efficiency, and market differentiation.
For example, a waste management company identified six ESG initiatives, including electric vehicle battery processing and green steel production, leading to a projected 30% increase in enterprise value.
In the building materials industry, Xella Group developed a robust ESG strategy that expanded EBITDA margins with a payback period of less than three years. This shows not only that it is possible to make money with sustainability, but also that financial returns from sustainability can ensue swiftly.
Bad Examples: Blackstone and KKR
Several of the largest PE firms in the world have made bold commitments about sustainability, but held ugly things in their portfolios.
As the world’s largest private equity firm, Blackstone has 85% of its energy portfolio invested in fossil fuels. Notably, it is a major investor in the Gavin coal plant in Ohio, known as the deadliest coal plant in the U.S. Once thriving, the entire surrounding small town was acquired and bulldozed to enable the coal plant to keep operating.
Approximately 78% of KKR's energy portfolio companies are rooted in fossil fuels. The firm has made significant investments in gas and liquefied natural gas (LNG) projects, including the Coastal GasLink Pipeline in Canada, which has faced opposition from Indigenous communities and environmentalists. KKR reported only 14,342 tons of greenhouse gas emissions in 2023 — when the real climate impact of its entire portfolio is estimated at 6,500 times higher than that.
PE firms employ some of the best-educated minds in the world. It is truly a shame that, at this point in time, short-termism and issues with company culture contribute to environments where these minds cannot spot an unprecedented opportunity for value-creation.
How to Discern the Good, the Bad, and the Ugly
We’ve covered a few negative examples already, but there are some positive examples out there as well. Below is how you discern which PE firms genuinely care, and which ones are up to no good.
Signs of Good PE Firms
PE firms with a solid sustainability track record generally exhibit the following signs:
They impose tangible and trackable sustainability metrics on all their portfolio companies.
Sustainability-related outcomes are tied into executive compensation and deal structures.
They have sector-specific ESG strategies, showing that they thought deeply about how to “do sustainability” properly.
They have hired operational ESG expertise in the form of dedicated sustainability professionals.
Good examples of PE firms that are on a good way are EQT, who use science-based targets for emissions reduction and requires all portfolio companies to align with ESG value creation plans. Partners Group is known for deeply integrating ESG into investment due diligence. B Capital Partners took this one step further and developed an open-source ESG due diligence tool to improve sustainability assessments across its investments.
Note that just because a PE firm invests in fossil does not mean that it is bad. In fact, it can be impactful to snap up a carbon-intensive company and reduce its emissions. Reducing the emissions of a big polluter by just 1 percent can be more meaningful than reducing the emissions of a solar farm by 70 percent.
Even the pioneers in this field still struggle to integrate sustainability into financial valuations though. This is a pity in a sector that strongly depends on valuations for virtually every deal they make. Firms like Wangari Global are developing tools to aid these PE firms and get an even better grasp on how they can make money while doing sustainability.
Signs of Bad PE Firms
Bad PE firms treat sustainability as a checkbox exercise. Signs of this are the following:
Uses third-party ESG ratings (e.g., Sustainalytics, MSCI) as a substitute for real due diligence.
No internal teams or processes to validate and act on ESG data, even when the size of the PE firm warrants full-time staff on this topic.
Claims commitment to net-zero or carbon neutrality but provides no roadmap for achieving it.
No evidence of sustainability improvements in portfolio companies.
ESG is only integrated at the due diligence stage but not in the holding period or exit strategy.
Carlyle Group, for example, is publicly committed to sustainability but continues to invest in fossil companies. There is little to no indication it is decarbonizing these companies at all.
Brookfield Asset Management advertises heavily with its green investments. It seems to be smoke and mirrors, though—half of its energy companies are fossil fuel, and they only meet 17% of climate demands for a net-zero world.
This being said, investors do have a way to sway these firms. Below is what you can do to drive betterment in this sector.
What Investors Should Demand from PE Firms
Limited partners—for example pension funds, sovereign wealth funds, and endowments—need to become more demanding of PE firms. This is in their own interest, because sustainability indeed drives higher returns (see here a study by BCG, research from Copenhagen Business School, and research by Impact Alpha backing this up).
Full Transparency in ESG Reporting
Many PE firms publish voluntary, unaudited ESG reports that lack granular details. Investors should require third-party verification of sustainability disclosures. Luckily, regulations like CSRD are pushing them in the right direction—investors need to support this.
PE fund reports should demonstrate year-over-year ESG improvements (e.g., reduced carbon emissions, higher energy efficiency, improved workforce diversity). A red flag are firms that only publish qualitative ESG goals with no measurable impact data.
ESG Integration Beyond Due Diligence
Many PE firms consider ESG only at the investment selection stage, but investors should demand ESG integration throughout the holding period and exit strategy. ESG should influence pricing, operational plans, and portfolio company strategy—not just be an item in the due diligence checklist.
In particular, sustainability and ESG should influence valuation and risk management. If ESG risks don’t impact the price PE firms pay for assets, it is likely not taken seriously.
ESG-Linked Compensation
If a firm claims to prioritize ESG but does not tie compensation to sustainability results, it is a red flag. Where compensation data is not available, investors should ask for it.
Sector-Specific ESG Strategies
ESG risks and opportunities vary significantly by sector—investors should demand customized ESG integration. Leading PE firms also invest in sustainable technologies to future-proof their portfolios.
Absent such strategies, it is likely that they do not take the topic seriously enough. Their investment pipeline for emerging ESG trends will often give investors insight into the granularity of a PE firm’s approach.
Active Engagement
Some firms are passive investors, and that’s okay. However, when a PE firm invests in high-emitting industries, it is paramount that they actively engage with their portfolio companies. If they are passive and invested in carbon-intensive assets, then they are not cutting emissions but rather helping finance them further.
Some firms boost ESG ratings before an exit just to increase valuation—investors should therefore demand long-term ESG commitments that persist beyond PE ownership. This can be checked by looking at whether portfolio companies continue ESG improvements post-ownership.
The Bottom Line: It’s Getting Harder to Sustain the Hype—Luckily
The era of superficial ESG and greenwashing in private equity is not yet over—but its days are counted. Regulatory pressure is increasing, institutional investors are getting more demanding, and sustainability risks are increasingly in focus.
The EU’s CSRD and SFDR regulations, along with the SEC’s climate disclosure rules, are making greenwashing harder to sustain. Firms that relied on vague ESG claims will soon be forced to provide hard data or risk legal and reputational fallout.
Pension funds, sovereign wealth funds, and endowments are now demanding real ESG impact—not just sustainability-themed brochures. LPs are increasingly screening for sustainability risks, and firms without a solid ESG strategy may struggle to raise funds. As impact-driven PE strategies outperform, investors will redirect capital toward firms with proven sustainability credentials.
PE firms will also not thrive if they do not truly embrace sustainability: Firms that embed sustainability into their investment thesis often generate higher financial returns. Companies that demonstrate sustainability leadership will prefer PE investors that align with their values. Data shows that ESG-aligned businesses command premium valuations at exit, particularly in industries where climate risk is material.
The future of PE is a lot more transparent, and a lot less about hype. They either do sustainability right, or risk being left behind—both financially and strategically.
One Smart Question
The correct answer will be revealed in next Tuesday’s edition.
Answer of last week’s One Smart Question: The biggest challenge for AI in ESG-driven investment strategies is the lack of standardized data.
Wangari’s Curated Reads
Financial data is incredibly lucrative. As
writes in an in-depth piece, financial data firms outdo fellow companies by 30-40x—or much more. 10,000x. Bloomberg’s return and why financial data is so darn lucrative is a brilliant piece that shows how data production, distribution, and proprietary insight generation of it is Really Big Business. At Wangari Global—a financial data firm—we’re taking notes.- has a clear and compelling piece for us: 3 Reasons Why Biology is a Growing Asset Class explains why more and more investors are betting on biology. Without giving it all away, note that biological data is incredibly complex but also lucrative, that more and more biotech firms are embracing a decentralized model for fundraising, and that fostering transparency and traceability of environmentally friendly innovations is gaining traction. What’s the next biotech company that you have your eyes on?
If you’ve wondered how public-private partnerships (PPPs for short) work,
have you covered. The nuts and bolts of public-private partnerships is a short but informative piece on this. Unlike standard PE deals, PPPs often aim for very sustainable projects that carry social value. This is therefore a very good way to clean up the PE sector in some circumstances.