Squaring the circle: sustainability, private equity and value creation
How working with an established global private equity platform can boost alignment to sustainability goals without compromising financial return requirements.
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Private equity continues to gain prominence in institutional portfolios – and for good reason. Amid geopolitical turbulence and economic uncertainty, investors are increasingly turning to the asset class to access differentiated, resilient and potentially premium return opportunities.
At the same time, we have seen two major forces shaping the sustainability and impact (‘S&I’) agendas of investors:
- the changing political and regulatory landscape relating to sustainability themes; and
- evolution of S&I-related best practices that can drive value creation, particularly relating to evolving climate risks and supporting the move to a more circular economy.
On the surface the challenge seemingly lies in bridging these trends: seeking to access the return and diversification potential of private equity, while delivering tangible progress on sustainability goals across a wider portfolio. For example, Pitchbook’s 2025 Sustainability Survey once again confirms the perception – and, we believe, misconception – that incorporating sustainability or ESG into private equity requires sacrificing potential returns.
In fact, private equity is well positioned to support delivery against societal sustainability goals. This reflects the asset class’s focus on backing disruptive business models, its inherently long-term investment horizons, and the high levels of control managers can exert over investee companies compared to listed equity.
This is especially true for investors targeting small and mid-market private equity, in which Schroders Capital specialises. SMEs are estimated to drive up to 70% of global employment and GDP, meaning investing responsibly in these businesses can have a major societal impact (see graphic below).
In addition, and in relation to portfolio return objectives, target companies in this space can be especially well positioned for transformative growth and value creation – and in the current market context, are generally more insulated from some of the recent global trade tensions.
Why private equity can support delivery against sustainability goals
Source: WEF, Schroders Capital 2025. The views shared are those of Schroders Capital and may not be verified.
The small and mid-market accounts for a huge investment universe that makes up more than 90% of private equity deal volumes – and an even larger prospective investment funnel. Specific expertise is therefore needed to navigate this very broad and deep set of differentiated market opportunities, in relation to which there is a wide range of potential performance outcomes.
Moreover, when a private equity mandate is executed through experienced partners, sustainability objectives can not only be incorporated as a core consideration for a private equity allocation – but can be seen as a true value driver within it, supporting positive long-term investment and sustainability outcomes.
Sustainability as a driver of value
Building on these points, navigating private equity requires more than capital – it also requires access, diligent sourcing, and deep industry experience and strategic insight. For investors newer to the asset class or seeking to expand into new areas within it, partnering with a specialist manager, like Schroders Capital, can help.
Core to our own approach is a conviction that sustainability is one of five key value creation drivers that we, as private equity managers, can deploy to add long-term value to investee companies. In this it sits alongside consolidation (buying and bolting on complementary businesses and assets), professionalisation (enhancing governance), internationalisation (expanding into new markets) and innovation (launching new products, services and technologies). We seek to deliver this approach through active engagement with our general partners (external fund managers, or ‘GPs’) and the lead investors alongside whom we invest, focusing on three key areas:
- Transparency & governance: Providing resources and encouraging the adoption of leading governance policies on sustainability topics that set clear targets and objectives – and setting the expectation that these policies and processes are communicated regularly and openly with stakeholders.
- Reporting: Disclosure of relevant sustainability (and impact) key performance indicators (KPIs) – and seeking to drive higher disclosure standards within the industry to enable measurement of sustainability outcomes and identify value creation opportunities, as well as to meet regulatory expectations of our clients.
- Thematic priorities: Identifying the key themes that are relevant to, and can drive management and performance of, a specific fund strategy or investee company, including but not limited to: climate change, human rights, human capital management, diversity and inclusion, and biodiversity.
In practical terms, we proactively engage with our GPs and, where appropriate, co-develop bespoke value creation plans, by sharing industry best practice and resources to encourage them to improve integration of ESG risks and opportunities. The end goal is to increase financial performance by driving operational S&I-related enhancements within portfolio companies.
We also often play a significant role in the development of specifically impact-related value creation plans, as a number of our private equity impact co-investments are made alongside non-impact managers, who seek our guidance and expertise.
Highlighting the potential for S&I to be a value driver within private equity, Schroders Capital recently published an article building on a broader research paper, published with the Said Business School at Oxford University, focusing on outcomes for impact-focused investments within our broader private equity portfolios.
Our findings showed that impact-focused investments made between 2014-2023 meaningfully outperformed 10-year buyout and growth returns across the market. You can read the full research here.
Case study: driving value in data centre efficiency
As a tangible example of this approach, Schroders Capital acquired a secondary stake in a fund focused on enterprise software, climate tech, data and cloud infrastructure businesses.
Following our investment and reflecting our sustainability assessments of the manager and portfolio, we strongly encouraged the GP to adopt an ESG policy, join the UN-based Principles for Responsible Investment (PRI), and prioritise data centre operational and energy efficiency as a material value creation risk and opportunity.
Within a year, the GP had joined PRI and published its first formal ESG policy – and it had sought transparency from AWS and Azure, both key energy offtakers from its portfolio companies’ data centres, on energy consumption and hosted an ecosystem event on the matter.
Another year later, the GP was able to attribute a 30% reduction in cloud consumption and related costs, and a consequent 3% gross profit margin increase for at least one portfolio company.
Looking ahead: manager and investor priorities
At our private equity Advisory Board Meeting in June 2025, we asked our investors for their top three S&I-related agenda items for the next 12-18 months. The aggregated answers highlighted a focus on ESG data, climate as a theme, and SFDR Article 8 investments.
The GPs that we invest alongside are equally clear: they recognise similar and growing investor expectations around sustainability integration, reporting and regulation. But they also highlight value creation as a top agenda point.
In response to a recent Schroders Capital survey, most indicated that they are looking to us to share industry best practices identified among our wider GP network, as well as for guidance on what S&I-related data to collect and why, and on regulatory developments and requirements such as SFDR in Europe and SDR in the UK.
There is some tension reported among GPs between climate-related expectations of investors and the reality of financial materiality, as a majority invest in asset-light businesses in which tangible climate impact is harder to deliver. In contrast, there is strong alignment on decarbonisation roadmaps, which start with the collection and reporting of greenhouse gas (GHG) emissions. This is something most are willing to do as they are aware of the regulatory requirements of end investors.
Meanwhile and from a value creation perspective, GPs ask us to mediate within the industry to make sure it is understood that the value add of climate strategies for many portfolio companies may not be convincingly strong. Instead, the climate conversation that is gaining more traction is around thematic and targeted climate solutions investing, as many ‘enablers’ are found in our lower- and mid-market investment universe and there is often a clear growth opportunity.
Key takeaways from our GP survey include:
Sustainability is a value driver
“Sustainability is no longer separate from value creation – it is value creation. That is why we fully integrated ESG due diligence into our commercial and operational due diligence. We are glad that Schroders Capital has been very supportive towards us making this change to our process."
Viviana Occhionorelli, Partner, Head of Sustainability, Astorg
Engagement by private equity platforms is key to enhance capabilities
“We’re a lean team – we are appreciative that Schroders Capital has been able to show us how to go from policy to practice. They specifically guided us in how to launch our latest fund as SFDR Article 8.”
Jakub Wronkowski, Head of Marketing, Tar Heel Capital
It is important that we set reasonable, yet standardised ESG reporting targets
“Schroders Capital’s perspective on ESG frameworks and best practices has helped us strengthen our internal monitoring and reporting standards. Based on their inputs, we have incorporated deeper ESG KPIs and expanded sections in our annual ESG and Impact Report. Schroders’ participation across multiple funds with an ESG-focused approach has also enabled us to unlock DFI (development finance institution) capital, as LPs increasingly value structured ESG and impact integration.”
Sudhir Sethi, Founder & Chairman, Chiratae Ventures
Conclusion: where performance meets purpose
Private equity is a growing part of the investment landscape and can have a profound impact on meeting broader sustainability goals, as an active, disruption and growth-oriented long-term asset class.
Working with an expert manager to build private equity investment portfolios can be an effective way to gain targeted or broader exposure – and, as this article shows, it can also be an effective option to deliver against portfolio investment as well as sustainability and impact goals.
When these two objectives are combined, the potential of sustainability to be an active value creation and returns driver within a private equity portfolio shines through.
Further reading
- Schroders Capital research: The investment case for impact in private equity.
- Our two-part guide on how to bring private market investments into a broader decarbonisation framework.
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