- Limited Partners (LPs) globally are increasingly integrating ESG as awareness, implementation, and action reach critical mass.
- ESG is shifting from a PR and risk mitigation exercise to a value creation driver, though regional perspectives vary.
- Measurement challenges remain, but ESG integration is vital for LPs, potentially impacting future investments.
- LPs and GPs have growing tools and strategies for ESG implementation, balancing environmental and DEI priorities and ongoing evaluation.
Environmental, social, and corporate governance (ESG) standards are no longer a peripheral concern but a central tenet for businesses worldwide, particularly for Global Limited Partners (LPs). These sophisticated investors recognize that proactive ESG initiatives deliver a spectrum of benefits, extending beyond mere compliance.
The era of ESG as a simple “check-box” for risk mitigation is rapidly concluding. Global limited partners are progressively viewing robust ESG factors as a significant value enhancer for investment performance. In fact, a demonstrable lack of strategic and thoughtful ESG consideration can now present substantial hurdles—even outright cancellation—for prospective deals.
Written in collaboration with
Written in collaboration with
Challenges persist, notably in bridging the measurement gap. While reconciling diverse methodologies remains complex, progress is accelerating. The concept of net-zero carbon, once nebulous, is becoming increasingly quantifiable with more precise emissions footprint measurement tools. However, the practical reality of collecting high-quality, comparable ESG data across a diverse investment portfolio presents ongoing difficulties. Global limited partners must navigate a complex landscape of frameworks and approaches to translate high-level ESG policies into concrete, data-driven actions and processes.
To understand the evolving perspectives of global limited partners in this dynamic market, the Institutional Limited Partners Association (ILPA), in collaboration with Bain & Company, conducted a survey of over 100 LP organizations. The survey responses, supplemented by in-depth follow-up interviews, provide invaluable insights into recent ESG trends and the key concerns of LPs operating on a global scale.
ESG Influence Reaches a Tipping Point Among Global Limited Partners
The results of the joint survey unequivocally demonstrate that ESG is now a mainstream consideration for global limited partners. In terms of awareness and practical mobilization, a growing proportion of LPs are actively incorporating ESG factors into their investment decision-making processes and are deeply considering the potential impact on their private equity (PE) investments.
Over two-thirds of survey respondents confirmed that ESG considerations are integral to their organizational PE investment policies. Among these LPs, approximately 85% have incorporated at least some ESG initiatives. Notably, over half have fully implemented ESG-specific policies, with an additional 33% reporting partial implementation. Overall, these policies now influence approximately 76% of the PE assets under management held by the surveyed global limited partners (see Figure 1).
Figure 1
ESG considerations affect most LP investment decisions, with significant implications for private equity
As one respondent highlighted, formalized policies are crucial for demonstrating a tangible level of ESG commitment. Another respondent emphasized the importance of an initial focus on “awareness, education, foundational policies, and processes” to facilitate a subsequent “shift to the next frontier on accountability, impact, and systemic issues.”
The global limited partners interviewed indicated that many of these ESG policies are driven by increasing global concerns surrounding climate change and the recognized value of diversity, equity, and inclusion (DEI) initiatives. One respondent expressed a clear expectation “to see evidence [that general partners (GPs)] are making climate change a board-level issue” and demonstrating “systematic engagement with portfolio companies on climate risk management.”
However, the pace of ESG implementation varies across geographies for global limited partners. The survey revealed that the highest rates of ESG integration are observed outside of North America. While 83% of responding LPs headquartered in Europe and an impressive 92% in other global regions reported having established ESG policies, only 62% of North American-based LPs have taken similar steps.
The Business Case for ESG Integration: Beyond Risk Mitigation for Global LPs
The primary reasons cited by global limited partners in the survey for integrating ESG considerations into their investment policies are twofold: a strong belief that ESG enhances investment performance and a commitment to transparent ESG communication with stakeholders. An additional third of respondents attributed ESG integration to a desire to direct investments towards opportunities that make a demonstrable “positive contribution” (see Figure 2).
Figure 2
Half of responding LPs see ESG as additive to investment performance
While the perception of ESG as “additive to investment performance” is a significant driver for its integration across the investment lifecycle, a notable divergence exists between European and North American global limited partners regarding the perceived influence of ESG adoption on valuation. A substantial 70% of European LPs agreed or strongly agreed that robust ESG commitments positively influence valuation premiums. In contrast, only 38% of US-based LPs shared this perspective.
The survey results underscore the growing benefits of ESG integration and highlight the increasing risks associated with neglecting ESG considerations for global limited partners. Furthermore, an interesting regional pattern emerges concerning the primary drivers of these risks.
Only a small minority, 7% of surveyed LPs—all of whom were North American firms—indicated they would not withdraw from an investment due to ESG-related concerns. Analyzing the reasons for potentially abandoning investments revealed a key distinction: North American LPs are predominantly focused on ESG risk mitigation, while their European counterparts prioritize opportunities to actively drive and enhance ESG performance.
Nearly three-quarters of North American respondents cited the potential for negative publicity as a significant deterrent, potentially leading them to withdraw from an investment. In contrast, only half of European LPs expressed the same level of concern. Conversely, 44% of North American LPs viewed a lack of commitment to improving poor ESG performance as a deal-breaker, compared to a significantly higher 78% of European LPs. Furthermore, European LPs were approximately twice as likely as North American LPs to be concerned about a misalignment between a firm’s ESG mindset and their own (43% vs. 26%) or inadequate ESG reporting (13% vs. 6%) (see Figure 3).
Figure 3
ESG-related risks and a lack of ESG performance improvement are the most dominant reasons LPs walk away from investments
One respondent noted the increasing sophistication of global limited partners in discerning the true value of ESG initiatives, stating they can readily identify “the difference between meaningful action and greenwashing.” Another recalled a scenario where the comprehensive integration of ESG standards by a firm’s leadership became the decisive factor in selecting between fund managers with otherwise comparable performance records.
Addressing Monitoring and Measurement Challenges for Global LPs
Significant opportunities remain for global limited partners to more effectively integrate ESG considerations throughout the entire fund investment process. Firms committed to ESG initiatives can assess potential investments at both the fund and firm levels, and systematically incorporate ESG factors into fund screening, due diligence, and ongoing portfolio management (see Figure 4).
Figure 4
ESG adoption is considered most frequently in due diligence
- Only 43% of respondents currently consider ESG initiatives during the initial fund screening phase. Among those who do, a substantial 66% utilize ESG considerations as part of negative screening processes (aiming to avoid underperforming entities or products/services deemed controversial). Approximately 40% employ ESG information for norms-based screening (assessing against minimum standards), and a further 41% incorporate ESG initiatives into positive screening (identifying top performers).
- The most widespread adoption of ESG considerations occurs during the critical due diligence phase, with nearly three-quarters (73%) of global limited partners factoring them into their evaluations. These LPs integrate ESG factors into their assessment of investment committee discussions (84%), GP questionnaires or due diligence questionnaires (DDQs) (63%), and the utilization of formal assessment frameworks and internal scorecards (49%).
- Just half of the respondents indicated that ESG adoption has direct implications for ongoing portfolio management. This is primarily manifested through the assessment of ESG-related risks (88%), continuous monitoring of ESG performance and key performance indicators (KPIs) (73%), and the identification of ESG-driven value creation opportunities (59%).
Private equity firms seeking to demonstrate genuine commitment to ESG integration—and global limited partners aiming to rigorously evaluate these efforts—encounter two primary challenges: the inherent difficulty in quantifying and effectively monitoring ESG performance (a concern for over 69% of respondents) and the persistent lack of harmonized reporting standards across the industry (highlighted by over 50% of respondents).
Nearly half of surveyed global limited partners expressed a clear desire for GPs to provide specific, relevant, and material ESG-related KPIs. However, across the majority of ESG themes, fewer than 20% of surveyed LPs explicitly request such detailed reporting. This situation leaves GPs facing significant hurdles in providing robust, relevant data to convincingly demonstrate that their ESG efforts are more than superficial “greenwashing.”
The need for reliable data providers is evident. However, current data provision services often present limitations, including a significant reliance on estimated data and the input of inconsistent or overly generalized actual data. Calculating environmental KPIs also poses considerable difficulties: Fewer than 25% of GPs were consistently able to provide data on scope 1 and 2 emissions when requested, and less than 30% could consistently supply data on all principal adverse indicators. While LPs reported higher rates of successful identification for social and governance KPIs, substantial opportunities for improvement remain across all ESG themes (see Figure 5 and Figure 6). Furthermore, variations exist in determining the appropriate level of reporting granularity. For example, scope 1 and 2 emissions are typically reported at the fund or portfolio company level, whereas metrics related to gender diversity, litigation, and corruption are more frequently tracked at the firm level.
Figures 5-6: Figure 5
Few limited partners ask their general partners to report ESG key performance indicators at the firm level
Figures 5-6: Figure 6
General partners face challenges providing data for the most frequently requested ESG-based key performance indicators
Our research strongly suggests that ESG initiatives and considerations will continue on an upward trajectory for global limited partners. For some LPs, the current lack of precise data and dependable measurement solutions significantly impedes their ability to fully pursue their ESG priorities. The positive outlook is that rapid advancements in the availability of necessary data and measurement capabilities are anticipated.
We observe a continuing increase in the number of global limited partners taking a leadership role in driving the incorporation of robust ESG policies and practices throughout their investment value chain—and actively seeking to validate measurable progress. This proactive desire is reflected in our research, which indicates that a significant 80% of responding LPs expect to escalate their requests for detailed ESG reporting from GPs over the next three years (see Figure 7).
Figures 5-6: Figure 7
Limited partners expect increases in ESG investment allocations, reporting, and in-house capabilities
For example, one respondent described developing a detailed taxonomy to rigorously assess whether potential investments align with the UN Sustainable Development Goals (SDGs). LP recommendations are now integrated into the underwriting process for each fund and serve as a valuable tool to evaluate progress between subsequent fund-raising cycles. Another LP has launched an ESG roundtable discussion forum specifically for GPs, facilitating knowledge sharing, experience exchange, and progress updates amongst key stakeholders.
Measurement methodologies are also undergoing continuous refinement, with capabilities evolving in tandem with technological advancements. Firms are increasingly investing in dedicated staff to oversee data management and enhance transparency in ESG reporting. Furthermore, specialized third-party experts can provide valuable assistance in tracking key metrics and generating comprehensive reports. We anticipate that these collective efforts will empower global limited partners to gain deeper, more granular insights and drive further progress in ESG integration.
Indeed, a significant 68% of surveyed LPs anticipate increasing both their ESG investment allocation and their in-house ESG-related capabilities over the coming three years. This period will be pivotal for both LPs and GPs to collaboratively overcome existing measurement challenges, effectively translate overarching policies into concrete, data-driven processes and actions, and develop reliable, standardized methods for measuring impact and ensuring compliance. Firms that proactively advance ESG initiatives, including rigorous tracking and transparent reporting, stand to gain significant strategic advantages with minimal risk.
The ILPA-Bain ESG Survey clearly demonstrates that ESG adoption is a critical differentiator for both global limited partners and GPs operating in the private equity landscape. When implemented effectively, ESG integration can empower LPs to simultaneously enhance ESG outcomes and drive financial performance.
As a growing number of GPs and LPs realize tangible ROI from their ESG initiatives, these considerations will become even more integral to overall firm and portfolio company performance. Improved measurement techniques are expected to not only boost ESG performance but also unlock a range of additional benefits. Companies that prioritize ESG will be better positioned to capture market share, attract and retain top talent, build resilient and ethical supply chains, and effectively mitigate risks associated with irresponsible business practices.
Strategic Next Steps for Global LPs and GPs to Maximize Value from ESG Adoption
To transition from high-level ESG policies to tangible, performance-driven processes and actions, global limited partners and GPs should prioritize the following key steps:
- Concretize ESG policies and fund strategies. LPs and GPs should begin by adopting well-defined, quantifiable ESG ambitions. These ambitions should be underpinned by robust operating models and clearly articulated purpose statements. Focus on identifying meaningful, measurable changes that can be realistically achieved across short-, medium-, and long-term horizons. One LP interviewee highlighted the significant efficiency gains from utilizing shared, standardized questionnaires to streamline these efforts.
- Prioritize environmental and DEI measurements. While a broad spectrum of focus areas, including human rights, are undeniably important, environmental and DEI considerations address systemic, high-risk issues of paramount global concern. Over 31% of LPs participating in our survey have already established net-zero commitments, with over half of European LPs taking this step (see Figure 8). One LP shared their innovative approach of hiring a meteorologist specializing in weather-related physical risk to directly contribute to their team’s risk analysis process.
- Embed ESG evaluation into every stage of the investment value chain. This necessitates integrating ESG considerations into fund and sector screening, rigorous due diligence processes, and ongoing portfolio management. GPs and portfolio companies should proactively analyze performance against relevant ESG KPIs to drive meaningful engagement with ESG-linked value creation opportunities. As one respondent aptly stated, “There’s so much opportunity to do more. We’re starting to think more strategically about where we want to be five years from now.”
- Facilitate capability building across the PE industry. LPs can significantly enhance their internal capabilities by expanding in-house resources and establishing dedicated teams to coordinate ESG initiatives. One survey respondent noted that their in-house PE program, established a decade ago, has had ESG standards as a core component from its very inception. Developing in-house expertise over the long term can substantially simplify the adoption and implementation of future ESG initiatives.
Figures 5-6: Figure 8
Over the next three years, most LPs will focus their efforts on climate, ESG reporting, internal capacity building, and DEI
While challenges undoubtedly remain, adopting a passive “wait-and-see” approach carries the significant risk of missing out on strategic value-creation opportunities and potentially allowing competitors to gain a decisive competitive advantage. Fortunately, global limited partners and GPs have access to an expanding range of options and resources to drive improvements in ESG performance.
ILPA provides a valuable Due Diligence Questionnaire and Diversity Metrics Template designed to standardize key areas of inquiry for investors during manager due diligence and provide a structured framework for ongoing monitoring of DEI progress. ILPA also offers a comprehensive ESG Assessment Framework to assist LPs in evaluating and benchmarking GP responses to due diligence inquiries, inform constructive goal-setting discussions with GPs, and effectively measure ESG integration progress over time. Both resources are trusted and publicly available to the global private equity community.
Bain & Company further emphasizes that companies can leverage the growing ecosystem of third-party firms specializing in establishing baseline performance and tracking ESG progress over time. Bain itself has strategically partnered with and taken minority stakes in two leading firms in this space: Persefoni, offering a cutting-edge climate management and accounting platform, and EcoVadis, whose widely recognized business sustainability rankings for global supply chains provide investors with valuable insights into ESG maturity.
Regardless of the specific solutions chosen, the focus on proactive ESG adoption is firmly established and here to stay for global limited partners and the broader private equity industry. The significant growth trends identified in our survey data point towards a future characterized by increasingly robust ESG initiatives. LP and GP leadership that takes decisive action now will be optimally positioned to capitalize on the resulting demand and secure long-term success in a rapidly evolving investment landscape.
This report was prepared by the leadership team of Bain & Company’s Global ESG Private Equity team in conjunction with ILPA with special direction from Axel Seemann, advisory partner, and an editorial team led by Maggie Locher. The authors wish to thank in particular Jackie Han, ESG Private Equity manager, and Theresa Reisch, consultant, for their significant contributions to this report.
[
With more than 575 member institutions representing over 2 trillion USD of private equity assets under management, the Institutional Limited Partners Association (ILPA) is the only global organization dedicated exclusively to advancing the interests of LPs and their beneficiaries. Our members include public and private pensions, insurers, endowments and foundations, family offices, development finance institutions, and sovereign wealth funds. Our policy agenda is focused on strengthening the private equity asset class through strong governance, alignment of interests, and transparency.
