How ESG create financial value in Private Equity: evidence from BCI

For several years, ESG has been facing increasing backlash in the private equity industry. Too political. Too complex. Too costly to monitor. Too uncertain given evolving regulation.

Some of these criticisms are understandable.

What is far less discussed, however, is the only question that truly matters to investors:

👉 Does ESG create financial value?

A recent study conducted jointly by Stanford Long-Term Investing and British Columbia Investment Management Corporation (BCI) provides one of the clearest, most data-driven answers to date.

Their conclusion is unambiguous: when treated as an investment discipline, ESG can materially increase enterprise value.

This article explores how.

BCI Private Equity and Stanford Long-Term Investing define ESG value creation as:

This definition deliberately reframes ESG away from abstract impact narratives. ESG becomes relevant only when it affects cash flows, margin trajectory, volatility, or valuation multiples. In practice, ESG data is analyzed in the same way as operational KPIs or strategic indicators, using an ESG assessment framework designed to surface what is truly material for the business model.

This framing is critical. It establishes ESG as an input to investment judgment, not as an external constraint imposed on it.

One of the most important clarifications made by BCI PE is the distinction between risk management and value creation.

In most private equity firms, ESG remains largely confined to the risk dimension. BCI PE explicitly separates the two logics and assigns them different roles across the investment lifecycle.

ESG as a risk management tool (pre-investment)

At the pre-investment stage, ESG is primarily used to identify and price risks. ESG considerations are embedded into the ESG Vendor Due Diligence (VDD) alongside commercial, financial, and legal due diligence. Findings from this work can directly influence valuation assumptions, downside cases, and the structuring of ESG clauses in shareholder and credit agreements.

At this stage, ESG rarely creates immediate upside. Its role is to protect value by reducing uncertainty, clarifying liabilities, and ensuring that risks are appropriately reflected in pricing, representations, warranties, and covenants.

ESG as a value creation lever (during holding period)

The real inflection point occurs post-close. During the holding period, ESG moves from a defensive tool to an active lever for performance improvement and strategic differentiation.

This is where ESG initiatives are deliberately selected, financed, and executed because they are expected to impact EBITDA, reduce earnings volatility, or strengthen exit positioning. In this phase, ESG is no longer about avoiding downside - it is about engineering upside.

This distinction is fundamental. Many investors stop at risk management. Very few make the leap toward ESG-driven value creation.

BCI Private Equity’s ESG strategy rests on three principles that mirror the discipline applied to any other investment lever.

Rigor – ESG as an investment-grade discipline

ESG initiatives are subjected to the same analytical standards as financial or operational projects. Assumptions must be explicit, data must be auditable, and outcomes must be measurable. This rigor allows ESG performance to be discussed credibly with investment committees and external stakeholders.

Profit – ESG initiatives prioritized on financial materiality

ESG initiatives are only prioritized when they affect the fundamental drivers of value creation. These include margin expansion, cost efficiency, capital intensity, risk-adjusted returns, and exit multiple potential. ESG is not treated as a cost center but as a portfolio-wide value creation agenda.

Integration – ESG embedded across the investment lifecycle

ESG is embedded across the entire investment lifecycle. It is not managed as a standalone workstream, but fully integrated into due diligence, portfolio reviews, Management Incentive Plans (MIP), and exit preparation. This integration ensures alignment between ESG objectives and financial outcomes.

What clearly positions BCI PE as best-in-class is their decision to integrate ESG at every stage of the investment cycle, with the same rigor as financial and strategic analysis.

ESG during investment due diligence

During due diligence, ESG is assessed alongside market dynamics, competitive positioning, and financial performance. The ESG VDD helps identify material risks, but also surfaces opportunities that may not yet be reflected in the business plan.

From an investment perspective, ESG can:

• Reveal hidden risks
• Justify valuation adjustments
• Clarify reps & warranties
• Identify future value creation opportunities

At this stage, ESG mainly serves as a risk-filtering mechanism, but it also establishes the baseline from which future value creation initiatives can be measured.

ESG during the holding period: from data to EBITDA impact

This is where ESG becomes financially decisive.

However, BCI PE’s experience highlights a critical prerequisite: high-quality, consistent ESG data across the portfolio.

Without reliable data, ESG cannot be managed, prioritized, or monetized. This is precisely where platforms such as Greenscope play a critical role, enabling investors to translate ESG signals into financially relevant insights at scale.

Given limited internal ESG resources and large portfolios, BCI PE made a very deliberate choice:

• Focus only on initiatives with a proven or projected ROI
• Require a minimum expected exit multiple impact (≥ 0.25x)

This discipline delivers two key benefits:

1. Clear prioritization of initiatives
2. Strong engagement from investment teams, as ESG initiatives directly impact: EBITDA Exit outcomes Management incentive plans

ESG stops being a constraint and becomes a shared financial objective.

ESG at exit: building a value creation narrative

At exit, ESG only matters if it is credible, documented, and clearly linked to business performance. Buyers and financial sponsors increasingly scrutinize ESG as part of the Information Memorandum, not for ESG reporting completeness, but for evidence of resilience and strategic positioning.

When ESG initiatives are tied to cost reduction, revenue resilience, operational stability, or customer alignment, they strengthen the equity story and reduce perceived risk. Over time, this can translate into exit multiple uplift - provided ESG performance has been tracked consistently throughout the holding period.

BCI PE’s portfolio provides several concrete examples of ESG-led value creation.

Logistics portfolio company – workforce-driven value creation

In one logistics company, BCI PE supported the redesign of a “driver-first” operating model. Initially framed as a workforce initiative, the program delivered tangible financial benefits: lower turnover, fewer accidents, reduced fuel consumption, and improved competitiveness in RFP processes. These operational improvements translated into approximately $144 million in projected enterprise value uplift, supported by both operational and financial data.

B2B manufacturing company – EHS as growth and risk lever

In another case, BCI PE partnered with a B2B manufacturing company to overhaul its EHS strategy. Beyond reducing insurance premiums and operational disruptions, the initiative enabled the company to access new markets as ESG criteria became increasingly embedded in customer procurement processes. The combined impact resulted in approximately $159 million in projected enterprise value uplift.

Across BCI PE’s portfolio, ESG has functioned neither as a reporting obligation nor as a reputational exercise. It has operated as a financially material lever, influencing EBITDA, risk exposure, strategic optionality, and exit outcomes.

The message for investors is clear. ESG creates value only when it is treated with the same discipline as any other investment variable. This requires robust data, a clear ESG assessment framework, ROI-based prioritization, and strong alignment between ESG objectives and financial incentives.

The ESG debate in private equity often misses the point. The relevant question is not whether ESG should matter, but whether it is managed as part of the investment process.

BCI Private Equity’s approach demonstrates that when ESG is integrated across the investment cycle, grounded in data, and directly linked to EBITDA and exit multiples, it becomes a powerful driver of value creation.

BCI Private Equity’s approach and use cases demonstrate that ESG can increase exit multiples by 5–15% hey are directly linked to EBITDA improvement, earnings stability, and clearly documented risk reduction throughout the holding period.

This is not about sustainability ideology.

It is about investment discipline - and it is rapidly becoming a competitive advantage for sophisticated private equity investors.