How GPs are Quantifying ESG-Driven ROI

Guest post by: Larissa Machiels, Head of Impact at Holtara

Ask a general partner how ESG creates value, and the answer usually comes easily. Ask them to put a number on it, and the confidence tends to thin out fast.

Regulatory pressure and demand for transparency have pushed private equity firms to invest in ESG policies, portfolio data, and governance structures. The harder question now is different: can firms show, in financial terms, where that work creates value?

General partners (“GPs”) are under growing pressure to prove that sustainability work translates into stronger earnings, lower operational risk, and higher prices at exit, rather than a cleaner story for limited partners (“LPs”).

A shift from narrative to number

For many firms, ESG has historically been viewed through a risk and compliance lens. Now it is being pulled more directly into value creation plans, with closer scrutiny of its effect on operating costs, revenue, risk exposure, and business resilience.

The commercial opportunities are already visible at portfolio company level. Energy efficiency work can cut operating costs and improve margins. Better supply chain planning can reduce disruption and protect revenue. Stronger governance can lower legal and reputational exposure. Investment in employee wellbeing can improve retention in sectors where skills shortages constrain growth.

Companies with credible sustainability credentials may also find it easier to win customers with climate or sustainability requirements, secure better financing terms, or strengthen their position during a sale process.

Take a manufacturing business installing rooftop solar as part of a broader plan to cut carbon emissions. The first economic effect is relatively easy to see: lower electricity costs and improved margins. The same investment may also help the company win contracts from customers that now require suppliers to show progress against climate targets.

Both effects may contribute to EBITDA. A further source of value may emerge later if buyers view the company as lower risk or better placed to retain key customers. The measurement question is where each benefit sits, and how confidently it can be attributed to the original investment.

Proof is the hard part

Most GPs can point to a case like that one. Fewer can show their working.

Those that can demonstrate return on investment (“ROI”), rather than describe it, may start to stand apart from firms relying on narrative alone.

Two methods are taking shape.

The first works from the bottom up, linking ESG initiatives directly to the P&L through cost, revenue, and EBITDA. Because it is built on company-level operational data, it can draw a clear line between a sustainability initiative and a commercial result.

For investment teams and portfolio company management, that detail can support better capital allocation. It can show which ESG initiatives move the numbers, and which do not.

Its weakness is its strength: it depends on operational and financial data that many portfolio companies are still building. Direct attribution can also be difficult. A fall in energy costs may be easy to trace to a solar installation. Higher revenue may have several causes, making the ESG contribution harder to isolate.

The second method looks outward rather than inward. It asks whether companies with stronger ESG performance command higher valuations in the market.

Investors may pay more for businesses they judge to be more resilient, lower risk, or better placed to retain customers and respond to regulatory change. This approach can help when comparing companies or sectors where ESG issues carry material financial weight. It may also support the equity story ahead of an exit.

The limitation is, again, in attribution. Multiple expansion rarely has a single cause. Any claim that ESG alone produced a higher valuation is likely to rest on assumptions rather than a financial effect that can be traced line by line.

In practice, the two methods can be complementary rather than competing. Bottom-up measurement can give management teams evidence to act on. Valuation work can help test how ESG factors may affect market perception, fundraising discussions, and exit preparation.

Used together, they can build a fuller picture of where ESG-related value sits.

The calculations still require discipline. A benefit captured in EBITDA cannot simply be counted again through an assumed increase in the valuation multiple. Clear attribution boundaries and transparent assumptions matter if the analysis is to withstand scrutiny.

How much measurement is enough?

Not everyone agrees on how far ESG quantification should go.

Some investment professionals argue that they already know high employee turnover is expensive, regulatory failures can destroy value, and fragile supply chains can interrupt revenue. Heavy measurement, under this view, risks adding work without improving the investment decision.

There is force in that argument. False precision is not better evidence.

Yet the absence of evidence creates a different problem. Without some form of financial attribution, ESG can remain detached from the investment case. Broad claims about value become harder to defend with investment committees, LPs, or prospective buyers.

At Holtara, we see effective measurement starting with materiality rather than the volume of ESG data available. The first question is not what a firm can measure, but which sustainability factors could materially affect the economics of the portfolio company.

A software company may focus on employee retention, data governance, and customer requirements. For an industrial business, energy use, waste, and supply chain exposure may have a more direct financial effect.

The metrics should follow the investment thesis and value creation plan rather than sit in a separate ESG scorecard with little connection to operating performance.

Good measurement also needs a clear use case. An investment committee may need evidence of downside protection or expected return. A management team needs metrics that help it decide where to spend. LPs and buyers may ask different questions of the same evidence.

The firms making progress are not attempting to assign a monetary value to every sustainability outcome. They are focusing on the factors with the greatest financial weight, setting a baseline, selecting relevant KPIs, and tracking the data through the holding period.

They are also clear about where attribution is strong, where it is partial, and where assumptions remain.

As scrutiny of value creation grows, the advantage will not sit with the GP that has the most polished sustainability narrative. It will sit with the firm that can show where ESG contributed to a stronger business, with evidence rather than assertion and, where the data allows, a number rather than a pitch.

For LPs and prospective buyers, that evidence is becoming part of how they assess the quality of a GP’s value creation model. The question is no longer whether ESG can create value. It is whether the GP can prove where it did.

 

About the Author:
Larissa Machiels is Senior Advisor & Impact Lead at Holtara, an Apex Group company, specializing in sustainability and ESG advisory services.