Sustainability: From nice-to-have to essential skill in private markets investment
Key takeaways
• Sustainability is now core to value creation in private markets—not optional—directly shaping cash flows, risk-adjusted returns, and exit valuations through financially material ESG factors.
• Employers expect investors to link ESG to pricing, costs, and capital allocation—not just compliance.
• Investment professionals must apply sector-specific sustainability insights to drive performance and mitigate long-term risk.
In private markets investing, an understanding of the interaction between sustainability and business performance is no longer optional.
Private equity, private credit and real asset investors typically invest in or lend to businesses over multiple years, trading the liquidity of public markets for the potential of higher long-term returns.
Over this long time horizon, sustainability considerations can become critical drivers of operational efficiency, value creation and risk mitigation.
Factors such as energy costs, labor practices, supply chain resilience, environmental regulation and data governance directly affect how companies generate cash and deploy capital. That, in turn, affects their ability to service debt or return capital to investors. Rising fuel prices or new emissions standards, for example, can materially change operating costs and capital expenditure requirements.
According to Martin Jarzebowski, CFA, Head of Thematic & Responsible Investing at Federated Hermes, private ownership naturally pushes sustainability considerations into the foreground.
While private equity investors and direct lenders may be exposed to long-term climate or social trends, the direct influence they can wield over portfolio companies also enables them to shape the response.
“Historically, sustainability and finance operated in silos,” Jarzebowski said. “But today, investment professionals must understand which sustainability factors are financially material, identifying red flags early in due diligence and using them not only to manage risk, but to drive value creation across the full ownership period.”
For investment professionals, understanding this reality is an important part of being job-ready in private markets today.
Employers increasingly expect investment professionals to understand how sustainability influences long-term risk, cash flows, and enterprise value. This expectation is not about values-based investing or marketing narratives: it reflects the realities of owning or investing in businesses over extended periods of time.
“If you want to be competitive in the market and have the highest odds of getting a role in a private markets shop, having some base level of familiarity with sustainability is wise,” said Vinay Shandal, Managing Director & Senior Partner at Boston Consulting Group. “It’s less of a lift for them to get you up the curve, and you can hit the ground running earlier.”
Value creation, not just compliance
Until recently, sustainability has been seen as a discrete skillset to investment management, with jobs concentrated in risk and reporting functions. While these still matter, private market employers are increasingly broadening their view of sustainability beyond satisfying reporting requirements, seeing it as directly relevant to returns.
Employers want investment teams to recognize when sustainability considerations shape revenues, margins, capital intensity, resilience or long-term growth.
“Private capital is seeing sustainability as more than risk and compliance. It’s a tool for driving value,” said Harriet Assem, Head of Sustainability at UK Private Capital.
As a result, investment professionals are upskilling to deepen their understanding of sustainability themes and their implications for business outcomes. Understanding how sustainability can create – or destroy – value is becoming an integral part of the investment consideration.
“As a first principle, investors need to focus on sustainability themes that translate directly into pricing, costs, capital needs and exit valuations,” said Jarzebowski.
Employers increasingly expect investment professionals to demonstrate basic knowledge of environmental, social and governance (ESG) factors – and to identify material risks and opportunities across different sectors, asset classes and business models.
“You should know what scope one, two and three emissions mean, but more importantly, know where it actually matters and where it’s just hygiene,” Shandal explained.
For an industrial manufacturer, for example, energy efficiency, emissions regulation and workplace safety may materially affect operating costs, capital expenditure plans and regulatory exposure. For a fintech platform, those factors are often less critical. Instead, data security, governance, regulatory compliance and customer trust may be central to enterprise value.
Applying the same simple ESG checklist to these businesses would signal weak investment reasoning. Private market employers expect prioritization that is rooted in how value is created and protected over time.
“Think bottom-up,” said Jarzebowski. “Which sustainability themes impact pricing power, capex needs, operating costs, liability exposure and exit valuation? That’s how investors use this information.”
He explained that sustainability materiality was inseparable from business fundamentals. “A medical device manufacturer is fundamentally different from a fintech,” he added. “Each has different drivers and different sustainability risks and opportunities.”
Adapting can be quicker than you think
Private market specialists often underestimate how well positioned they are to incorporate sustainability into their investment analysis.
Many already bring experience in financial analysis, credit assessment, real assets, governance or client advisory, and so the challenge is not relearning finance but recontextualizing it.
Craig R. Arends, Managing Principal of CLA’s private equity practice, found that formal study of ESG concepts helped consolidate experience rather than replace it.
“I don’t know if I necessarily had an ‘aha’ moment, but it cemented topics in a more coherent fashion and introduced an ethics perspective – doing the right thing, not just checking boxes,” he said.
That ethical grounding is particularly important in private markets, where transparency is lower and discretion is higher. “There’s never a right time to do the wrong thing, and there’s never a wrong time to do the right thing,” Arends added.
Focusing on what matters
This perspective is reframing what employers look for in talent. Not every investment professional is expected to be a sustainability specialist, but investment teams are expected to be able to engage with sustainability themes fluently, prioritize what matters, and incorporate those insights into long-term ownership and investment decisions.
Professionals who can demonstrate these attributes are also signaling a strong understanding of how private markets create value.
As Jarzebowski explained, sustainability becomes relevant once it is treated like any other financially meaningful information.
“When sustainability is tied directly to core financial concepts, such as cash flows, valuation and risk management, it stops being a separate discipline,” he said. “It simply becomes information a prudent investor would want to know.”
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