ESG Is Not Just an Obligation, but an Opportunity: Private equity and venture capital funds are increasingly recognizing ESG (Environmental, Social, Governance) as a lever for growth and returns. Studies show that funds with strong ESG integration can achieve valuation premiums of 3–19% and higher returns. In Germany, regulations such as the CSRD and EU Taxonomy are driving this transformation and opening up new opportunities. Recent research from Bain & Company further supports this, noting that ESG-focused funds are not only outperforming their peers in terms of returns but are also attracting more capital from Limited Partners who increasingly demand responsible investment practices (source).
Key Points:
Conclusion: ESG is no longer just a compliance issue, but a strategic tool for long-term success. Funds that consistently integrate ESG secure competitive advantages and higher returns, as evidenced by a growing body of research and real-world case studies.
Incorporating ESG factors into the due diligence process requires careful planning and structure. According to a survey, 57% of Limited Partners (LPs) now state that ESG aspects are a core part of due diligence—a significant increase from 38% in 2021. This trend is echoed in a 2023 Preqin report, which found that 60% of global investors consider ESG a critical factor in fund selection (source).
A clearly defined ESG assessment framework is essential. ESG topics should be directly integrated into the due diligence questionnaire. At the same time, it’s important to request and review the General Partners’ (GPs) ESG policies and reports. Operational due diligence (ODD) should also include ESG aspects as a fixed component.
Another key is developing evaluation and weighting systems that cover both industry-specific and general ESG topics. Renowned ESG data providers can supply valuable information here. Cross-validating this data from various sources ensures reliability and consistency.
| ESG Factor | Due Diligence Focus |
|---|---|
| Environment | Climate risk assessment, carbon footprint, resource efficiency, environmental compliance |
| Social | Labor rights, diversity & inclusion, human rights, data protection |
| Governance | Corporate ethics, anti-corruption policies, board diversity, ESG risk management |
| Supply Chain | ESG risk screening of suppliers, contract clauses, third-party audits |
Investment committees should actively incorporate ESG criteria into their decision-making processes and ensure that GPs adhere to the Principles for Responsible Investment (PRI). After due diligence, it is crucial to translate the insights gained into concrete KPIs.
Currently, only 56% of companies work with clearly defined KPIs, highlighting significant untapped potential. ESG data should be collected and analyzed regularly, ideally on a quarterly basis. A standardized scorecard approach can help present results clearly. It’s especially important to focus on the key value drivers.
An example of linking ESG and financial incentives is provided by the Carlyle Group, which utilized an ESG credit facility worth €2.75 billion. This ties capital costs to sustainability KPIs, creating real incentives to improve ESG performance across the portfolio.
Data from Invest Europe in 2021 shows that 77% of surveyed private equity and venture capital firms have integrated ESG processes into their investment and portfolio management strategies. Additionally, 31% of analyzed companies had an environmental management system, most of which were externally certified.
Another example is HV Capital from Germany. The company has firmly embedded ESG into its investment approach, including publishing an ESG guide for start-ups and anchoring ESG in fund documentation. With its “ESG by Design” approach, HV Capital supports young companies in growing responsibly from the outset.
Continuous monitoring of ESG performance is essential. Regular reports, updates, and external assessments keep investors informed about current ESG topics and changes. Beyond pure performance measurement, it is crucial to embed ESG strategically into business models—a topic explored in the next section.
Based on defined KPIs and data analysis, two fundamental approaches to ESG integration can be distinguished: a compliance-oriented and a value-creation-oriented approach. Both pursue different objectives and have a significant impact on the success of the ESG strategy. While compliance-oriented models focus on meeting legal requirements and minimizing risks, value-creation-oriented approaches aim to boost financial performance and create sustainable long-term value.
Ryan Williams, former CSO at Coatue Management, sums it up:
“Effective ESG integration delivers results for customers, employees, and investors.”
An analysis of corporate studies shows that 58% of cases examined display a positive link between ESG and financial performance. Companies with high ESG ratings achieved up to 3% higher annual returns than the market between 2015 and 2019. Compliance-oriented approaches specifically avoid negative ESG criteria that could lead to reputational damage, fines, or litigation, often involving sector selection and screening. Value-creation strategies, on the other hand, use ESG as a lever to enhance portfolio company performance—for example, through better corporate governance.
An example of the value-creation approach is the Rise Fund from TPG. The investment in EverFi, an edtech company promoting financial education and life skills, linked ESG goals with improved financial performance. This led to greater impact and a successful exit when EverFi was acquired.
ESG initiatives have proven to be effective approaches for reducing costs and increasing operational efficiency. A striking example is StandardAero, an aviation maintenance company. By introducing the GreenERmro™ initiative, environmental and safety metrics were digitally captured to identify targeted projects in energy, water, waste, and occupational safety. The result: annual savings of around €1.3 million. Contributing factors included a rinse water recycling system that saves about 15 million liters of water and reduces landfill waste by 75%, as well as a 7% reduction in fuel consumption in test cells.
Herman Miller also achieved significant savings through ESG measures. Switching from single-use packaging to reusable shipping solutions for chair components saved around €46,000 annually. Additionally, 266 labor hours were saved, and about 11,200 kilograms of cardboard per year were kept out of landfills.
Another example is UPS, which achieved impressive results by optimizing delivery routes using navigation software. The new technology reduced inefficient driving maneuvers, saving about 38 million liters of fuel, avoiding 20,000 tons of CO₂ emissions, and delivering 350,000 additional packages per year—with 1,100 fewer vehicles and approximately 46 million fewer kilometers driven. These efficiency gains create room for future growth strategies, especially in the climate tech sector. According to The Guardian, climate tech investments have surged globally, with Europe emerging as a leading region for both capital inflows and startup activity (source).
The climate tech sector impressively demonstrates how ESG investments and business growth can go hand in hand. In 2024, 71% of business leaders saw ESG investments as a competitive advantage, compared to 60% the previous year. PwC’s State of Climate Tech 2023 report notes that climate tech investment now accounts for over a quarter of all venture capital deployed globally, underscoring its growing importance (source).
The German market for ESG wealth management products, estimated at around $180 million in 2024, is expected to grow to $410 million by 2033—an average annual growth rate of 11.6%. Millennials and Gen Z, in particular, show a preference for value-driven investments. This forces PE/VC funds to align their strategies more closely with impact-oriented ESG offerings. Thematic investments, such as biodiversity-focused or net-zero portfolios, as well as the use of AI-powered ESG rating systems and robo-advisory platforms in wealth management, are driving this development. The success of such innovations is also reflected in higher exit profits.
Investors are willing to pay about 10% more in M&A scenarios if a company can demonstrate a consistently positive ESG record. Forecasts suggest that ESG assets could exceed a value of $50 trillion by 2025 (source).
An outstanding example is the collaboration between Polish convenience store chain Żabka and CVC Capital Partners. After the 2017 acquisition, CVC specifically identified ESG improvement potential, such as replacing refrigerants, reducing plastic packaging, and promoting plant-based foods. Żabka became the first retail company in Poland to introduce 100% recycled plastic bottles for private-label beverages. The company also launched a comprehensive CO₂ reduction program and was named “Green Portfolio Company of the Year” in 2020. These measures led to a lower franchise attrition rate, higher customer satisfaction, 20% sales growth within three years, and a 3.9 percentage point increase in gross margins between 2017 and 2020.
Another example is ICG’s European Corporate Fund VIII: 75% of portfolio companies improved gender diversity on their boards, 76% implemented a diversity & inclusion policy, and 87% actively executed corresponding initiatives.
“We believe that a company’s ESG score will soon be virtually as important as its credit rating.”
Cyrus Taraporevala, CEO of State Street Global Advisors
Worldwide, 88% of Limited Partners consider ESG performance indicators, while 72% of PE investors and managers include ESG risks and opportunities when evaluating potential portfolio companies.
Finding scalable climate tech solutions requires a clear and structured approach, with ESG criteria serving as filters for sustainable growth opportunities. Institutional investors are increasingly focusing on climate tech and raising their investment share in this area. This trend shows that the market has matured.
“The market has matured over the past year... There is more acceptance and conviction regarding climate change, and this is combined with a strong belief in the need to invest, with a real focus on returns.”
– Hampus Jakobsson, General Partner and Co-Founder of Pale Blue Dot.
AI-powered climate tech solutions, in particular, show great potential for scaling. Between January and September 2024, $6 billion flowed into startups in the AI-related technology sector—equivalent to 14.6% of total climate tech investment volume. The main focus was on autonomous vehicles (62% of AI investments) as well as industrial applications such as smart homes, agriculture, and intelligent energy solutions (20%). These technologies play an important role in supporting ESG assessments.
For private equity and venture capital funds, it is crucial to observe certain exclusion criteria in climate tech investments to comply with ESG standards:
| Environmental Exclusions | Social/Governance Exclusions |
|---|---|
| Nuclear power | Child labor |
| Fossil energy (oil, gas, coal) | Human rights violations |
| Intensive agriculture | Genetic engineering (medical) |
| Agricultural chemicals | Corruption/bribery |
| Intensive fishing | Gambling |
| Livestock farming | Alcohol/drugs |
| Animal testing | Weapons/armaments |
“In the climate tech industry, where you often have too much data to process efficiently or not enough data available, AI can provide solutions to better manage resources.”
– Enki Toto, Principal at the Salesforce Ventures Impact Fund.
A well-thought-out evaluation process lays the foundation for targeted investments and strategic support.
Fiegenbaum Solutions provides targeted support for climate tech startups by offering comprehensive consulting services for ESG-oriented private equity and venture capital investments. Led by Johannes Fiegenbaum, the consulting firm helps startups develop impact models, design decarbonization strategies, and meet regulatory requirements. Key services include lifecycle assessments (LCA) for products and organizations as a basis for investment decisions, as well as developing net-zero strategies and carbon reduction plans.
A particular highlight is scenario analysis, which models various growth paths and their environmental impacts. This enables funds to precisely assess the scaling potential and long-term ESG performance of their portfolio companies. In addition, consulting on CSRD and EU taxonomy compliance ensures that startups meet the necessary reporting standards from the outset. This not only reduces compliance risks, but also creates transparency about actual sustainability impacts. For young companies with limited resources, Fiegenbaum Solutions also offers special terms tailored to the needs of early-stage startups.
In addition to identifying and supporting innovative technologies, measuring climate impact is becoming increasingly important. It is a crucial building block on the path to global net-zero targets. Investors worldwide are increasingly integrating methods for capturing climate impact into their decision-making processes. Over the past five years, more than $1.5 trillion in private capital has been invested in climate finance. However, to achieve net-zero targets by 2050, global investments of around $150 trillion are needed (source).
The GenZero Climate Impact Measurement Framework complements ESG strategies by categorizing climate impacts into three types: direct, indirect, and transformative effects. Developed in collaboration with the Boston Consulting Group, this framework enables investors to better analyze and compare the climate potential of their investments. Practical approaches include proportional measurement of climate impact according to ownership share to avoid double counting, as well as capturing effects generated during the holding period. This methodology helps create a balanced portfolio of short- and long-term solutions.
Impacts are measured in CO₂ equivalents (CO₂-e). According to the UN Environment Programme, global CO₂-e emissions could reach about 56 gigatons by 2030 if current commitments are met. However, to achieve the Paris Agreement targets, this figure would need to drop to 25 gigatons of CO₂-e.
“If you can’t measure it, you can’t improve it.”
– Peter Drucker.
Regulatory requirements surrounding ESG (Environmental, Social, and Governance) are largely shaped by the EU. Private equity/venture capital (PE/VC) funds are particularly in focus, as they must comply with several key directives. One example is the Corporate Sustainability Reporting Directive (CSRD), which increases the number of reporting companies in Germany from 550 to 15,000 - depending on the Omnibus outcome.
In addition to the CSRD, there are other important EU regulations. The EU Taxonomy Regulation defines which economic activities are considered environmentally sustainable, while the Sustainable Finance Disclosure Regulation (SFDR) sets transparency requirements for financial market participants. The Climate Benchmark Regulation and the planned Regulation on Transparency and Integrity of ESG Ratings are also relevant.
At the national level, the Supply Chain Due Diligence Act (LkSG) creates additional ESG obligations for companies. The Climate Protection Act sets binding climate targets, compliance with which is monitored by BaFin. Violations of the CSR-RUG can result in fines of up to €10 million. The challenge now is to implement reporting requirements efficiently and in a standardized manner.
With these regulations, optimizing ESG reporting processes is moving to the forefront. The CSRD introduces the concept of “double materiality”, requiring companies to document both the impact of environmental changes on their business and the impact of their business on the environment. For PE/VC funds, this means that over 140 sustainability indicators (KPIs) must be collected and published.
The systematic collection and management of this data is a key challenge. Many funds rely on systems that integrate various standards such as CSRD, ESRS, EU Taxonomy, as well as GRI or DNK. A helpful tool is the Invest Europe ESG Reporting Template, which offers a flexible approach with three reporting levels (minimum, recommended, and full reporting) and can grow with portfolio companies.
A first step toward efficient reporting is conducting a materiality analysis to identify the most important ESG factors for the respective business model. PE/VC funds should involve interdisciplinary teams from finance, IT, sustainability, risk management, and legal in their preparations.
“Investors should be able to make investment decisions that align with their sustainability preferences. To do so, they need information that is both comprehensive and understandable.”
– BaFin
Technological support comes from ESG data platforms such as Tracera, which offer AI-powered solutions for data collection and reporting. Novata also specializes in supporting private market participants in managing ESG data.
An important aspect is the “trickle-down effect”, where even smaller companies not directly subject to the CSRD must provide sustainability information to larger, reporting companies in their supply chain. PE/VC funds should prepare their portfolio companies for these requirements early on.
Fiegenbaum Solutions offers PE/VC funds tailored support to meet complex ESG requirements. The focus is on developing reporting processes that comply with the CSRD and EU taxonomy, as well as implementing the European Sustainability Reporting Standards (ESRS) through double materiality analyses. These analyses consider both financial risks from sustainability issues and the impact of business activities on the environment and society.
Another focus is on setting up data collection systems that connect standards such as CSRD, ESRS, EU taxonomy, GRI, and DNK, avoiding redundant work. Support with scenario analysis is particularly helpful, allowing different regulatory scenarios and their impact on portfolio companies to be modeled.
For practical implementation, Fiegenbaum Solutions offers project-based consulting, such as for lifecycle assessments or ESG roadmaps. Alternatively, retainer agreements are available, providing ongoing support as regulatory requirements change. Transparent pricing with no hidden costs and special terms for early-stage companies make collaboration attractive even for smaller funds.
With Fiegenbaum Solutions, funds can not only ensure the measurability of ESG criteria but also minimize regulatory risks and gain competitive advantages. Efficient reporting processes are the key to successfully implementing ESG requirements.
ESG has long since evolved from a mere obligation to a genuine growth engine. Funds that consistently integrate ESG into their strategy demonstrably achieve higher returns. Studies show that top performers with strong ESG positioning achieve valuation premiums of 3–19%. In addition, 88% of Limited Partners worldwide consider ESG criteria in their investment decisions. These figures highlight how crucial comprehensive ESG integration is for success in the PE/VC market. According to a 2023 Harvard Business Review analysis, companies with robust ESG practices are also more resilient in times of crisis and better positioned to capture new market opportunities (source).
“Responsible investing is now smart investing.”
– Head of Sustainability, global pension fund.
Practical examples like HV Capital show how ESG can be prioritized from the outset. The fund has developed an ESG guide for startups and firmly anchored ESG aspects in its fund documentation. Such approaches demonstrate how ESG can be used as a strategic tool.
The key lies in systematic integration throughout the entire deal cycle. This starts with targeted ESG due diligence to identify risks and opportunities early on. Next, it’s about actively supporting portfolio companies in implementing goals such as decarbonization. At the end of the cycle, presenting a strengthened ESG profile at exit offers a clear advantage for potential buyers.
Regulatory frameworks in Germany, such as the CSRD, the Supply Chain Due Diligence Act, and the EU taxonomy, are further driving this transformation. Funds that proactively adapt secure not only compliance but also tangible competitive advantages—whether in capital raising or at exit. They are supported by specialized partners like Fiegenbaum Solutions, which offer tailored solutions for the challenges of ESG integration.
The examples show: A structured ESG strategy is the key to sustainable growth. Fiegenbaum Solutions supports PE/VC funds in establishing ESG as a growth driver—from double materiality analysis to the introduction of efficient data systems and the development of net-zero strategies.
Today, ESG is more than a trend—it is a must for long-term success in the German PE/VC market. Funds that act now will secure a clear lead in the future of responsible investing.
Private equity and venture capital funds can successfully implement ESG strategies by formulating clear sustainability guidelines, systematically integrating ESG criteria into their due diligence processes, and basing investment decisions on sustainable principles. Regular monitoring of ESG performance helps make progress measurable and identify potential risks early. According to a report by Institutional Investor, funds that embed ESG into their investment process see not only improved risk management but also enhanced access to capital and improved deal flow (source).
Integrating environmental, social, and governance factors not only provides the opportunity to meet legal requirements, but also enables funds to stand out in the market and achieve stable long-term returns. Practical examples show that ESG investments often go hand in hand with new developments—such as in climate technology—thus creating additional growth potential.
Integrating ESG criteria into the due diligence process offers tangible benefits for fund managers and investors. It enables early identification of potential risks, targeted assessment of sustainable value creation potential, and better compliance with increasing regulatory requirements. This not only minimizes risks, but also lays the foundation for more stable and long-term value development of investments. A 2022 PitchBook study found that funds with robust ESG due diligence processes reported 20% fewer portfolio company write-downs compared to peers (source).
ESG analyses also make it possible to identify companies with forward-looking, environmentally and socially friendly business models. Especially in a market where sustainability is becoming increasingly important for investors and regulators, such approaches are gaining significance.
The CSRD (Corporate Sustainability Reporting Directive) and the EU Taxonomy have a significant impact on the ESG strategies of PE and VC funds in Europe. They impose stricter reporting standards and uniform classifications for sustainable activities, requiring funds to disclose comprehensive ESG data. The European Commission estimates that these regulations will not only increase transparency but also help direct capital flows toward more sustainable businesses (source).
These regulations create greater transparency in reporting and make it easier for investors to assess sustainable investments. At the same time, they help funds identify and mitigate risks early by directly integrating ESG criteria into decision-making processes. For PE and VC funds, it’s not just about meeting regulatory requirements—ESG also offers the opportunity to create long-term value and remain competitive.