Sustainability and private equity: On the road to the "plateau of productivity"?
Amid a period of recalibration and polarisation, sustainability is moving beyond the buzzwords, hype and subsequent backlash to become a disciplined and critical driver of long-term value creation in private equity.
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How times have changed. As recently as five years ago, sustainability and ESG (environmental, social and governance considerations) were seen as among the most pressing imperatives for asset managers investing on behalf of institutional clients. Fast forward to today, and the landscape looks very different.
The political pendulum has swung sharply in the US, where ESG has become a cultural flashpoint. A backlash, institutionalised in policy rhetoric and state-level investment decisions, has reshaped how many large asset managers talk about sustainability.
Meanwhile, across Europe and other markets, sustainability remains a central pillar of policy and regulation. Yet even here, fatigue is palpable. Investors must navigate the shifting expectations of frameworks like the Sustainable Finance Disclosure Regulation (SFDR), evolving taxonomy rules, and overlapping legislative agendas across multiple jurisdictions.
However, despite this complexity in the wider environment, we believe sustainability has not diminished in importance for building high quality and resilient portfolios – and nor have most institutional investors retreated from its principles. This can be seen in public demonstrations of "backlash to the backlash" from some institutional investor groups targeting managers that have watered down or abandoned sustainability commitments.
From polarisation to recalibration
In short, while the pushback has been loud, what we are seeing play out is more accurately described as polarisation. Beneath the headlines and noise, we see sustainability consideration in investment as entering a new phase characterised not by rejection, but recalibration.
In this paper, we set out how institutional investors, particularly those with long-term horizons, are redefining sustainability’s role in portfolio construction – not as a moral imperative, but as a material driver of value and risk management.
Specifically, we set out the unique opportunity for private equity to align active ownership and company transformation with sustainability integration tied to broad societal mega-themes. Highlighting our own approach at Schroders Capital, we show how this presents clear opportunities to directly enhance financial performance and drive long-term value creation.
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