Materiality in Private Markets: ESG Beyond Disclosure

In the opaque world of private markets, information is the ultimate currency. Yet when it comes to ESG, data is often fragmented and lacks a clear, standardized linkage to a firm’s financial performance. This information gap is a significant challenge for financial institutions seeking to manage risk and identify value. To turn this challenge into an advantage, firms must move beyond a pure reliance on disclosure. The key lies in treating ESG materiality as a strategic discipline – identifying which environmental, social, and governance factors truly matter for value creation and risk management in private portfolios.

Materiality in ESG has evolved significantly. Today, it is widely understood through a dual perspective:

• Financial materiality – how ESG factors affect a business’s performance and valuation.
• Impact materiality – how a business affects society and the environment.

Together, this concept is known as double materiality. Within the EU, the Corporate Sustainability Reporting Directive (CSRD) has enshrined double materiality into law, requiring in-scope firms to evaluate both sustainability risks to their business and the impact of their activities on the world around them. While CSRD applies primarily to EU entities meeting size or listing thresholds (and indirectly to global firms with significant EU operations), its framework is setting a benchmark for investors globally.

For private markets, applying this dual perspective is complex. General Partners (GPs) and Limited Partners (LPs) often rely on incomplete or inconsistent disclosures, varying widely between portfolio companies and even across reporting cycles. A robust materiality framework can cut through this noise, helping investors prioritize the ESG factors most relevant to long-term value creation and operational resilience.

Read more: The Rise of the EU Social Taxonomy: What It Means for Investors

In private markets, ESG disclosures are often insufficient to provide a reliable basis for decision-making. Key challenges include:

• Lack of standardization: Unlike public markets, private companies lack a universally accepted reporting framework. Initiatives like the ESG Data Convergence Initiative (EDCI) are making progress, but adoption is not yet universal.
• GP–LP information asymmetry: LPs depend heavily on GPs for ESG data, which may be curated and lack comparability across portfolios.
• Greenwashing risks: Without strong frameworks and verification, ESG claims can be overstated, creating reputational and financial risks.
• Limited insight into value creation: Disclosures rarely capture how firms are actively working to enhance their sustainability practices and long-term impact potential.

This is why ESG integration in private markets must go beyond disclosure — toward strategic insight and materiality-focused analysis.

For private equity firms, double materiality can be translated into actionable steps:

• Assess inward ESG risks: For example, modeling how climate-induced supply chain disruptions, water scarcity, or carbon pricing could impact future cash flows.
• Evaluate outward impacts: Examining how portfolio companies affect biodiversity, communities, or labor rights.
• Integrate into diligence & engagement: EU-based investors, and increasingly global investors with EU exposure, must align with CSRD expectations, but best practice dictates incorporating this analysis early in deal selection and throughout ownership.

This dual view not only meets regulatory and investor expectations but also surfaces opportunities to enhance both financial and societal value.

ESG integration is increasingly viewed not as a compliance exercise but as a strategic lever within the investment lifecycle:

• Pre-investment: Screening for ESG risks and opportunities helps funds avoid stranded assets while uncovering growth potential. Several studies suggest funds with strong ESG practices may experience higher risk-adjusted returns — though outcomes can vary by geography and sector. The evidence increasingly points to ESG integration as a contributor to long-term resilience.
• Post-investment: Supporting portfolio companies in improving energy use, waste management, or labor practices can translate into cost savings, operational efficiencies, and enhanced enterprise value. Case studies across industries show ESG improvements can deliver meaningful valuation uplifts with relatively short payback periods.
• Governance and knowledge sharing: By embedding ESG expertise and sharing best practices across their portfolios, GPs foster a culture of sustainability that drives systemic improvements.

Unlike public markets, private investors cannot depend on continuous public disclosures to analyze ESG performance. Instead, a multi-pronged approach is needed:

1. Qualitative Insights: Site visits, stakeholder engagement, and supply-chain mapping provide contextual depth, though difficult to scale.
2. Benchmarking Frameworks: Standards such as SASB or initiatives like EDCI create some level of comparability, but still lean heavily on self-reported data.
3. Independent Data Solutions: To complement these methods, specialized providers are emerging, offering structured ratings for private companies. For example, Inrate’s private company ESG assessments focus on core business activities and provide comparable ratings similar to public market benchmarks. These tools are designed to address data gaps, enabling a scalable, independent, and transparent view across portfolios.

By combining ground-up insights, industry benchmarks, and independent assessments, private equity investors can form a more comprehensive view of ESG materiality.

Read more: Ratings for Public Companies

When ESG is integrated as a value-driver rather than a disclosure exercise, it translates into tangible benefits:

• Value creation: ESG improvements enhance resilience and differentiation, positioning companies for premium valuations at exit.
• Risk mitigation: Early identification of ESG risks prevents surprises during exits, IPOs, or acquisitions.
• Capital access: Investor appetite for ESG and impact-oriented funds continues to grow. For example, Preqin data indicates Article 8 funds in Europe report IRRs broadly in line with the wider private equity market, challenging the notion that sustainability compromises returns.¹
• Investor alignment: A significant share of LPs now require robust ESG frameworks, making them a baseline for competitiveness.

To navigate ESG materiality effectively, financial institutions should:

• Develop robust frameworks: Tailored to regions and sectors, focused on material ESG risks and opportunities.
• Build team capacity: Ensure all investment professionals, not just ESG specialists, can identify and assess material ESG issues.
• Leverage technology & providers: Use analytics and independent ratings to supplement disclosure gaps and ensure portfolio-wide consistency.
• Collaborate with value chain partners: Align LPs, GPs, and portfolio companies on metrics and reporting priorities.
• Pilot and scale: Test ESG measurement and integration processes, then expand based on demonstrated ROI.

Read more: ESG Insights for Private Equity and Debt

In private markets, ESG materiality is not simply about disclosure, it is about integration, insight, and strategic value creation. By applying a double materiality lens and adopting scalable tools that go beyond voluntary reporting, financial institutions can better identify risks, unlock opportunities, and meet the rising expectations of regulators, investors, and society.

Firms that embed ESG materiality into their investment approach stand to capture significant competitive advantage, not just meeting compliance obligations, but shaping more resilient, valuable, and impactful portfolios.