ESG
A Q&A with Petra Funds Group
Once considered a niche priority, ESG now plays a central role in private market strategies driven by investor demand, regulatory shifts, and long-term value considerations.
In Europe, ESG has become embedded in regulation and practice, while in the U.S., ESG remains polarizing and politically charged. Yet across jurisdictions, limited partners (LPs) are demanding greater transparency, regulators are introducing more rigorous disclosure frameworks, and general partners (GPs) are expected to show measurable progress. For small and mid-sized private equity firms in particular, meeting these expectations can be challenging and expensive.
To explore how GPs can negotiate these challenges while managing costs effectively, we sat down with Charlie Chipchase, Managing Director and Head of Petra’s ESG group, and Tamara Close, Senior Director.
They shared their insights into what ESG means today, why it matters more than ever, and how an outsourced solution can help fund managers meet stakeholder expectations, unlock value at the fund level, and make more efficient use of time and resources.
Q: What is ESG, and why should private fund managers care?
Charlie: Done correctly, integrating ESG considerations across the firm and its portfolio allows a GP to raise capital quicker, protect the capital they have, and grow capital, which typically translates into better IRRs. It also helps to attract top talent, avoid regulatory scrutiny, and enhance reputation.
ESG can be viewed as a set of environmental and societal issues that, due to their growing relevance, have become material to business performance and influence core drivers of enterprise value. For a GP, this means integrating environmental, social and governance considerations into investment decision-making and fund operations. The importance of ESG stems from the generally accepted view that ESG is tied directly to long-term value creation, risk management, and reputational resilience. Or, as one founder said recently, “if you’re in business to sell your business, then make sure you’re creating something that your buyer wants to buy.”
LPs also care deeply. They typically work over longer time horizons and see ESG as a sign of operational excellence, risk sophistication, and alignment with modern investing mandates.
Despite the headlines, ESG has shifted from being an ancillary consideration to being a core determinant of GP selection. LPs now demand evidence of embedded ESG processes, KPIs, climate risk management, robust governance, and accountability.
Finally, regulatory focus on ESG has progressed rapidly in Europe, Canada, and APAC and, despite political headwinds in the U.S., has already arrived in California and is tabled in other states. GPs marketing funds need to be acutely aware of the fast-moving regulatory paradigm, both domestically and across the jurisdictions in which their portfolio companies and LPs operate.
For example, more than 20 jurisdictions, representing nearly 55% of global GDP, have decided to use or are taking steps to introduce the International Sustainability Standards Board (ISSB) standards into their legal or regulatory frameworks. This is materially influencing what institutional LPs in markets such as the UK, Canada, and Australia now expect from their manager relationships, particularly around consistency, comparability and decision-useful sustainability disclosures.
Q: What are some of the challenges that GPs are seeing today when implementing an ESG program?
Tamara: Implementing and maintaining an ESG program year-on-year is far from straightforward. It has become increasingly onerous and expensive for a GP. Challenges include finding experienced talent, navigating shifting regulatory and LP requirements, and keeping abreast of new and increasingly complex ESG issues and frameworks.
Establishing an institutional-grade ESG function requires end-to-end integration of ESG practices across the investment lifecycle from strategy and diligence to monitoring, value creation, and reporting, overseen by a solid governance process and underpinned by a robust data framework.
To implement an ESG program effectively requires both deep private markets-focused ESG and financial expertise and experience.
At a minimum, ESG talent needs to be versed in all the aspects of material ESG exposures, risks and impacts of the fund, be able to engage with, identify and help implement value creation strategies for portfolio companies that can reasonably be expected to lead to valuation uplifts at exit, as well as be experts in the various current and upcoming regulations and disclosure requirements across multiple jurisdictions.
For small and mid-sized firms, the cumulative demands on people and processes can be hugely time-consuming and costly.
Internal GP teams continue to shoulder the increasing burden of ESG-related LP and regulatory reporting, often to the detriment of the jobs they were hired to do. The cost of being a responsible investor has increased rapidly, and the vendor options have proliferated.
Q: At Petra, you call it a new operating model for ESG. What is this new model and why has it come about? How can an outsourced ESG team help alleviate those challenges?
Charlie: As ESG practices have matured, and as costs, complexity and reporting requirements have increased, forward-thinking GPs have recognized that a new operating model is needed to respond to LP expectations, create value at the fund-level, and enable a more efficient use of time and resources.
This new operating model is an outsourced approach that provides fund managers with the depth of expertise and experience they need without the cost or commitment of building an internal ESG function. Typically, however, it is complemented by in-house ESG talent when a GP reaches a certain AUM.
At Petra, we implement this operating model with our fund manager clients and act as an extension of their team.
We are a team of senior, experienced former in-house PE professionals providing end-to-end support with ESG strategy, diligence, value creation, portfolio monitoring, exit planning, and LP and regulatory reporting.
We meet our clients where they are, offering support that can scale up or down depending on the GP’s needs, allowing the GP to demonstrate real ESG integration without diverting internal resources from their core investment activities.
It is both cost-effective and efficient, ensuring that managers can meet LP and regulator expectations without the expense of a permanent team.
It’s important to understand that, given the complexities of the current landscape, outsourcing parts of ESG delivery, when done properly, isn’t a weakness but rather a strength and can be a competitive advantage when used to increase coverage and quality.
Q: How do you see LPs and the market responding to this new operating model?
Tamara: LPs are very supportive of this new operating model. Having a senior, experienced team managing a GP’s ESG requirements allows the GP to focus their efforts elsewhere.
The evolution of ESG reporting in private markets has led to significant changes in how GPs manage their ESG obligations. As LPs demand more detailed and frequent data, the role of internal ESG leaders and their teams has become crucial. However, the increasing complexity of ESG reporting and the focus on cost management by PE firms have prompted many GPs to engage ESG service providers for routine monitoring and reporting tasks (in a similar vein to how CFOs outsource/co-source to fund administrators or how GCs outsource to law firms).
While the core strategic responsibilities of a Head of ESG may remain in-house, depending on the strategy and the size of the GP, outsourcing to specialized ESG providers offers a viable solution to manage costs and maintain data integrity.
This approach allows GPs to align their strategy, balance efficiency with the growing demands of ESG reporting, and ultimately benefit both GPs and LPs.
The industry’s shift towards this hybrid model – combining internal strategic oversight with outsourced operational execution to an experienced team – demonstrates a pragmatic response to the escalating demands of ESG.
As private markets continue to adapt to these new expectations, the balance between in-house expertise and outsourced support will likely become more standardized, ensuring robust, transparent, and timely ESG reporting across the asset class. The key is finding the external team that has the experience and expertise to be able to do this in a consistent manner with top-tier results.
Q: But what about rising costs? How does this new operating model save money for GPs?
Charlie: Put simply, GPs are increasingly allocating certain ESG costs (e.g., diligence, monitoring and reporting) to the underlying funds pursuant to fund LPAs, and are able to successfully defend this to their LPACs as a legitimate “partnership expense”.
Therefore, while there may be a need to have one individual at the GP be the key point person on ESG (or Head of ESG when AUM exceeds say $10-20 billion), hiring multiple ESG-dedicated FTEs at the GP does not generally make sense when a GP can access senior private market ESG professionals and allocate the fees back to the underlying funds.
By engaging firms like Petra, a GP is able to manage costs and reduce the operational burden around retaining and mentoring staff. This means in-house personnel (including a Head of ESG) can focus on more “front office” tasks, such as meeting with existing and prospective LPs and generally being more strategic in their role.
They will also be able to leverage the breadth and expertise of Petra’s team who will provide guidance on best practices and advice on how to drive the GP’s ESG program forward as part of the ongoing engagement.
Q: Where do you see ESG practices heading in the next 3–5 years?
Charlie: As ESG considerations are increasingly seen as a core part of a company’s ability for resilience and growth, expectations on GPs from both regulators and LPs will continue to rise. The next few years will bring greater standardization, particularly in Europe, where regulations are already converging around disclosure requirements. We expect LP expectations will, on average and across jurisdictions, continue to rise, and move beyond policies toward demonstrable outcomes and ultimately value creation. Technology will play a greater role in enabling real-time ESG data collection and analysis, and the market will likely consolidate with a few major players leading the industry.
ESG will continue to shift from being seen as a compliance cost to being recognized as a driver of competitive advantage. Managers who act early to embed scalable frameworks will be better positioned to satisfy investors and differentiate themselves in fundraising.
From a resourcing and cost perspective, GPs will increasingly outsource ESG reporting and other adjacent tasks to trusted third-party vendors, who can work as an extension of their team, bringing senior experience and expertise in the same way that GPs outsource fund administration and legal advice.
Final Remarks…
ESG’s importance is increasing globally. It is central to raising capital, protecting capital, and building capital. Yet for many private equity firms, the resource demands of building an internal ESG function are unrealistic.
Petra’s ESG group bridges that gap by offering a senior team of dedicated advisors, tailored to each firm’s needs at a cost that makes sense. We designed our ESG offering to give GPs access to deep ESG expertise without the overhead of building it from scratch.
To learn more about Petra’s ESG offering, visit our website or reach out to Charlie Chipchase or Tamara Close.