ESG Risk Management in Private Equity: Strategies for Mitigating Long-Term Risks What are the key ESG-related risks in private equity, and what strategies can be employed to mitigate them?

Abstract

This thesis investigates the integration of Environmental, Social, and Governance (ESG) principles into the private equity (PE) industry, examining its evolution from a niche concern to a central pillar of sophisticated risk management and value creation. The study addresses the central research question: What are the key ESG-related risks in private equity, and what strategies can be employed to mitigate them? A dual methodology was employed, combining a comprehensive literature review with an empirical study. The empirical component consisted of a qualitative survey administered to a purposive sample of 16 experienced professionals operating within the European private equity and alternative funds sector. This approach allowed for the validation and enrichment of theoretical concepts with practical, real-world industry perspectives. The findings reveal that practitioners perceive Regulatory Risk and Governance Risk as the most significant threats, viewing the ESG dimensions as deeply interconnected rather than isolated issues. The research confirms that ESG due diligence is overwhelmingly considered the most critical mitigation strategy, supported by proactive ownership and transparent reporting. This integration is driven primarily by escalating demands from Limited Partners (LPs). The most significant practical barrier to effective implementation was identified as the scarcity of reliable data from non-public portfolio companies. The thesis concludes that ESG has fundamentally transitioned from a compliance-oriented task to a core strategic function within private equity. It serves the dual purpose of mitigating significant long-term investment risks while simultaneously acting as a key lever for enhancing portfolio company value. Successful ESG integration, therefore, depends not only on a firm's strategic intent but on its ability to build robust governance structures and overcome the practical data challenges inherent in private markets.