ESG integration in early-stage private equity investment processes

: qualitative insights from SME-focused GPs in Germany

Abstract

Amid growing pressure to address sustainability impacts, the integration of Environmental, Social, and Governance (ESG) principles has become standard for financial market participants. While ESG integration is well established in public markets, its application in Private Equity (PE) remains underexplored. Literature marks early-stage investment processes - particularly Due Diligence (DD) - as key for embedding ESG, with studies covering efforts across developed and developing PE markets. Despite Germany’s role as the European Union’s (EU) powerhouse and its large base of Small and Medium-Sized Enterprises (SMEs) facing financing constraints and decarbonisation needs, the German PE sector has received scant academic attention. This thesis explores how German PE firms targeting SMEs integrate ESG during early-stage investment stages, using a qualitative design based on 12 Semi-Structured Interviews (SSIs). The study finds that, while ESG has become an institutionalised factor in early-stage investment practices within German mid-market PE, its application remains fragmented and mainly shaped by external compliance pressures. This compliance-first logic drives risk-focused DD practices, with financial rationales prevailing and ESG’s strategic motivations remaining secondary - further constrained by SME’s limited ESG maturity. Looking ahead, amid geopolitical and regulatory turbulence, the study highlights a sector in transition: while ESG’s strategic relevance is expected to persist, a shift toward more outcome-driven and pragmatic application will be essential to translate compliance into tangible results.

Date of Award	23 Jun 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Carlos Miguel Pelicano Borges Teixeira de Azevedo (Supervisor)