Trends & developments

Australian regulatory and market shifts are accelerating ESG integration in private equity. Mandatory climate reporting under the Australian Sustainability Reporting Standards (ASRS), commencing from FY2025, requires portfolio companies to disclose climate risks, emissions, governance structures, and targets in line with financial reporting expectations. Private equity firms must assess their portfolio companies’ readiness and integrate climate considerations into investment processes.

ASIC has intensified greenwashing enforcement, requiring sustainability claims to be transparent and evidence-based. Firms face regulatory penalties and reputational risk if disclosures from funds or portfolio companies lack substantiation.

Stakeholder expectations continue to rise. Limited partners increasingly seek clear ESG accountability frameworks, data-backed reporting, and evidence that ESG considerations are embedded within business plans at both investment and portfolio company levels. Active stewardship and transparency are now central expectations.

The Australian Sustainable Finance Taxonomy, launched in 2025, defines sustainable economic activities and enables firms to classify assets and funds against nationally aligned criteria. This reduces ambiguity, supports consistency, and helps firms lower regulatory risk and strengthen fundraising positioning.

Broader global trends include rising focus on nature-related risks. With more than half of global GDP dependent on nature, firms are incorporating biodiversity loss and ecosystem impacts into ESG assessments and shaping nature-positive KPIs. Impact-oriented methodologies such as IRIS+ and the Impact Management Project are increasingly used in double materiality assessments. Public disclosure of ESG performance continues to expand.

In 2025, 5,296 PRI signatories exist globally, with investment managers representing around 76%. Approximately 65% undertake activities to address sustainability outcomes and 50% emphasise financial materiality as the investment driver. Despite some politicised resistance, major institutional investors overseeing more than $1.5 trillion do not plan to reduce responsible investing efforts.

ESG integration

ESG integration occurs across screening, due diligence, ownership, and exit.

Screening is shifting from solely negative screening to also incorporating positive screening. The Sustainable Finance Taxonomy narrows eligibility by defining what constitutes green and transition activities. Excluded sectors commonly include coal, oil and gas, cement, steel, and other emissions-intensive industries. Positively screened areas include renewable energy, energy efficiency solutions, and low-carbon technologies. Firms are advised to update screening frameworks, incorporate both positive and negative screens early, and assess taxonomy alignment during initial deal flow.

Due diligence increasingly involves standalone ESG assessments. Double materiality approaches capture financial and impact dimensions across operations, supply chains, and ecosystems. Compliance checks evaluate readiness for ASRS climate reporting and alignment with the Sustainable Finance Taxonomy. Recommended actions include integrating materiality assessments into ESG due diligence and developing post-acquisition ESG action plans within the first 100 days to address risks and capture opportunities.

Ownership expectations are rising due to ASRS requirements and Limited Partner-aligned ESG KPIs. Adoption of standardised ESG metrics through the ESG Data Convergence Initiative enables benchmarking and comparability across portfolios. Firms are urged to operationalise ESG KPIs across portfolio companies, build capability through training and governance support, and produce transparent disclosures that satisfy ASIC’s expectations for verifiable ESG claims.

Exit planning now requires clear evidence of ESG performance. Buyers increasingly apply ESG screens and link valuation premiums to demonstrable improvements such as emissions reductions, strengthened governance, or material social outcomes. Recommended actions include embedding ESG exit readiness from acquisition, documenting progress throughout ownership, and tailoring ESG narratives to buyer priorities. Firms should incorporate ESG positioning into data rooms, information memoranda, and management presentations.

ESG as a competitive advantage

ESG integration supports competitive positioning throughout the investment lifecycle. Strong ESG practices help attract sustainability-focused capital, potentially lower cost of capital, and improve deal sourcing by identifying high-quality, compliant opportunities. ESG initiatives can uncover growth markets such as renewable energy, sustainable products, and resource-efficient technologies.

Companies with integrated ESG practices may also be more resilient to regulatory and market changes. Evidence from PRI research suggests that strong ESG integration can support valuation uplifts of around 6.5% at exit, while 26% of limited partners cite improved risk-return profiles as a key reason for increasing ESG allocations.

The report positions ESG as both a regulatory requirement and a lever for operational value creation, strengthened risk management, and enhanced exit outcomes.