Sustainability now a critical value driver for private equity funds
Traditional methods of managing investment portfolios, such as financial reorganization and basic efficiency improvements, are no longer the sole factors for generating top-tier value. Modern private equity funds must now embrace environmental and social responsibility to protect their assets from financial risks, according to a white paper from EFESO Management Consultants.
While many firms currently focus only on following the law, others are mistakenly choosing between making a profit and being environmentally friendly. The white paper suggests that a more integrated approach can increase sales and improve profit margins.
The financial impact of carbon emissions is becoming a major factor in business success. In Europe, the cost for every ton of carbon dioxide produced is expected to rise from current levels to as much as €100 per ton within the next few years. And this affects more than just European companies: For example, it also affects American companies exporting to European countries.
Companies that do not take action today to lower their emissions face significant financial damage in the future. This is a global issue that affects any business involved in international trade or supply chains, regardless of where they are headquartered.
“Even though sustainability is rapidly changing markets, many private equity firms are doing only what’s necessary to remain legally compliant while others are unnecessarily trading profitability for sustainability,” said Andreas Dörken, partner at EFESO Management Consultants.
Regulatory landscape
New laws are also making it harder for companies to hide their true environmental impact. The European Union now requires large companies to be more transparent than ever about how their operations affect people and the planet.
Similarly, regulators in the United States have introduced rules to standardize how public companies report climate-related information. These changes are designed to prevent “greenwashing”, a practice where companies use misleading terms like "climate neutral" without providing real evidence.
“Mixed progress toward 2030 and net-zero targets for many companies calls into question the credibility of their ambitions, with many relying on false decarbonization solutions,” noted Dörken.
“The European Parliament passed legislation in early 2024 that will outlaw the use of terms such as ‘environmentally friendly’, ‘natural’, and ‘climate neutral’ without evidence when describing products and services, and introduced a total ban on using carbon-offsetting schemes to substantiate the claims; only sustainability labels using approved certification schemes will be allowed.”
Building a strategy
Success in this new landscape requires a deep look at every part of a business, from how products are designed to how they are recycled. Making a roadmap to transition to sustainability means addressing many issues at once, like identifying areas where pollution occurs and finding opportunities to boost biodiversity and inclusion.
Governance is an essential part of any sustainability strategy. Organizations need to set KPIs that enable the ESG transformation, put tracking and evaluation methods in place, and also work towards transforming the culture of the organization.
“Private equity firms can lose significant value if they ignore the risks associated with sustainability. EFESO Management Consultants has been helping private equity firms identify and reduce risks and create value amid this new sustainability business landscape,” noted Dörken.
Ultimately, the transition from older, high-pollution methods to modern, sustainable practices is a necessary journey for long-term survival. Firms that treat environmental goals with the same seriousness as financial targets are better positioned to attract funding and keep employees engaged. By focusing on real improvements rather than simple compliance, companies can build a lasting competitive advantage.
