Introduction
The Environmental, Social, Governance (ESG) data quality has been defined as the dependability, accuracy, and relevance of ESG data used in sustainability evaluations and investment choices. Among private markets, the quality of ESG data is increasingly acknowledged as a critical factor in separating major companies from competitors. For instance, in a 2025 study conducted among corporates to identify the challenges adopt ESG analytics showed that 48% of companies struggle with ESG data quality due to inconsistent data availability, specifically for social and governance parameters.
Importance of Data Quality in ESG Reporting
Evaluating long-term risks and opportunities
Investors rely on ESG data to evaluate a company’s long-term value, risks, and opportunities. High-quality ESG data enables investors to assess sustainability, identify risks, and capitalize on opportunities in the green economy.
Regulatory Compliance
ESG disclosures are moving from voluntary to mandatory globally and companies must disclose ESG data in line with recognized frameworks and standards – such as CSRD, SEC climate rules, and ISSB. This helps them minimize greenwashing, promote consistency and comparability across industries.
Trust Building
Consistent and accurate ESG reporting fosters trust among a variety of stakeholders, including employees, customers, investors, and the wider community. It demonstrates that a corporation is open about its impact and committed to sustainable and ethical operations.
Benchmarking and improvements
High-quality ESG data enables effective benchmarking, both internally and against peers. Companies can use this data to create goals, monitor progress, and identify areas for improvement.
Limited Partners (LPs) are a major driving force behind ESG integration in Private Equity (PE). This growing need for ESG compliance from LPs has a knock-on impact, driving General Partners (GPs) to embrace and integrate ESG practices into their investing strategies. To fulfill LP expectations and win capital commitments, GPs are incorporating ESG into due diligence, investment thesis, and reporting standards, fundamentally changing the investing landscape. In turn, GPs extend this dedication to their portfolio firms, collaborating closely with them to improve their ESG performance.
This cascade effect of LP expectations profoundly alters the dynamics of PE by incorporating ESG from the institutional level down to the operational practices of individual portfolio companies. Private markets encompass a broad spectrum of investments not traded on public exchanges. These may include private credit, private equity, venture capital, real estate, private infrastructure and natural resources.
Private market investments often involve a longer investment horizon and limited liquidity than their public counterparts. There are three main reasons to invest in private markets: Inflation hedging, Reduced volatility and Return potential. However, private markets have potential for PEs to expand the investable opportunity set, income generation and reduce portfolio risk. A recent study found that good ESG performance boosts equities return and lowers downside risk.
According to NYU Stern Center for Sustainable Business’s study of over 1,000 research published in 2023, excellent corporate ESG management improves Return-On-Equity (ROE), Return-on-Assets (ROA), stock price, operational efficiency, and risk management. This shows why risk management and performance improvement can boost company returns beyond ESG reporting.
Developing a Sustainable Competitive Advantage in Private Markets
Long-term company success depends on maintaining a sustainable competitive advantage. It entails creating distinctive talents and methods that competitors cannot easily replica. To accomplish this, you must have a thorough awareness of your industry, be constantly innovative, and capitalize on your key competencies. Differentiation, cost leadership, and a concentration on niche markets are all strategies for achieving long-term competitive advantage. Businesses may preserve their market position and promote development by producing value that competitors will find tough to replicate.
Research from 2022 has shown that 88% of customers are loyal to businesses that are socially and environmentally responsible. Moreover, European investors are placing growing importance on ESG, treating it as a key pillar of their investment methodology.
By 2026, climate-related weather events will project to cost suppliers a staggering 1.3 trillion USD. Companies that excel in employee satisfaction often have ESG ratings that are 14% higher than the global average, likely due to their impressive environmental initiatives.
Summary
ESG has the potential to generate substantial financial benefits when properly integrated. Private equity businesses stand to profit from greater due diligence, long-term viability, and value generation. However, ESG integration is not without hurdles. Managing ESG data, maintaining uniform reporting, and adhering to multiple regulatory standards necessitates specialized knowledge, data solutions, and active interaction with portfolio companies. As ESG becomes more integrated into investment strategies, companies that take a proactive and measurable ESG approach will be better positioned to lead in both financial returns and responsible value creation. Finally, adhering to ESG principles benefits individual businesses while also helping to build a more sustainable and fair global economy.
