The ESG landscape is moving fast, with regulatory change, investor preferences and technology reshaping how private equity firms operate. What might this look like in five years? In this article we discuss the trends most likely to shape ESG in private equity, from Scope 3 becoming the norm to AI-driven stakeholder engagement. By anticipating these shifts, GPs can adapt their strategies and keep delivering for LPs.
For a closer look at technology's role today, see the role of AI and technology in modern ESG management.
1. Scope 3 moves from voluntary to expected
Value chain emissions are already a regulatory requirement for a growing set of companies. In the EU, companies in scope of the CSRD report Scope 1, 2 and 3 emissions under the ESRS, even after the Omnibus reform narrowed that scope to companies with more than 1,000 employees and over 450 million euros in turnover. In California, SB 253 requires companies with over 1 billion dollars in revenue that do business in the state to report Scope 1 and 2 from 2026 and Scope 3 from 2027, subject to ongoing litigation. In jurisdictions adopting the ISSB standards, IFRS S2 also calls for Scope 3. Within five years, expect LPs to treat full-footprint data as standard for private equity portfolios. Early movers, following our step-by-step guide to Scope 3, will have cleaner data and fewer surprises.
2. Traceability and digital product passports
Supply chain transparency is becoming a product requirement, not just a reporting one. The EU's Ecodesign for Sustainable Products Regulation (Regulation (EU) 2024/1781) introduces the digital product passport; the first mandatory passport, for batteries, applies from 2027, with other product groups to follow. Portfolio companies in manufacturing, textiles, electronics and construction will need to hold verifiable data on materials, origin and environmental footprint at product level. Our article on digital product passport requirements and timelines explains what to prepare.
3. Growth of sustainability-linked and green financing
As we cover in our article on the ESG ratchet in lending agreements, sustainability-linked loans are now a standard tool in leveraged finance, governed by principles that the loan market associations updated in March 2025. Over the next five years, expect wider use of:
- Green bonds: proceeds tied to specific environmental projects.
- Social bonds: funding for education, healthcare or affordable housing.
- Sustainability-linked bonds: coupons linked to company-wide targets rather than to a project.
4. Nature and biodiversity join climate on the agenda
Climate is not the only environmental issue. Biodiversity loss, through deforestation, habitat destruction and pollution, is becoming a central ESG topic. The TNFD framework gave companies a structure for nature-related disclosures, ESRS E4 covers biodiversity for companies reporting under the CSRD, and in 2026 the ISSB agreed to propose nature-related disclosure requirements drawing on the TNFD framework, with an exposure draft expected in October 2026. Private equity firms in agriculture, real estate or infrastructure should expect LPs to ask about nature-related risks alongside carbon.
As data demands grow, so does the case for a proper data platform; see our guide to modernising ESG data management.
5. AI-enhanced stakeholder engagement
Beyond operational analytics, AI is changing how companies communicate with employees, communities and customers. Sentiment analysis can gauge reactions to ESG initiatives, and conversational assistants let investors and staff query sustainability data directly instead of waiting for a report.
6. Climate resilience becomes a metric
Extreme weather and climate volatility pose real risks to supply chains and physical assets. Expect more sophisticated tools for measuring climate resilience, from flood exposure to heat stress and local preparedness. These metrics are increasingly part of due diligence and can become deal-breakers in M&A.
7. Deeper integration of ESG into company culture
Regulation alone is not enough. Cultural change will gain ground as private equity managers find that sustainable performance depends on employee buy-in and mission alignment. For practical methods, see creating a sustainability mindset in company culture.
8. Continuous benchmarking and near real-time data
Benchmarks such as the ESG Data Convergence Initiative (EDCI) will keep converging on standard metrics and, increasingly, on more frequent data. Portfolio companies can expect ongoing data quality checks powered by cloud platforms and automated data capture, closing the gap between reported figures and reality on the ground.
Regulation will not move in only one direction
The EU's Omnibus package showed that sustainability rules can be scaled back as well as tightened: it cut the CSRD's scope and its datapoints and pushed the CSDDD back to 2029. What has not softened is investor demand. LPs subject to the SFDR still need adverse impact data, and lenders still price ESG performance into credit. For the detail, read our summary of what the Omnibus package changes in the CSRD, ESRS and CSDDD.
Risks if you do not adapt
- Regulatory exposure: as disclosure rules mature, gaps in data or greenwashing claims carry real penalties.
- Capital allocation: LPs increasingly direct commitments to GPs with a credible ESG track record.
- Stranded assets: businesses that fail to move towards lower-carbon models face devaluation or forced exits.
Strategic recommendations
- Invest in technology and skills: train teams on the platforms they will actually use, from emissions software to AI assistants.
- Adopt a forward-looking framework: build scenario planning and climate modelling into value creation plans.
- Collaborate with peers: share good practice and support common standards such as the EDCI.
- Engage regulators and communities: take part in policy consultations and local stakeholder events.
ESG in private equity is heading into a period of significant change, driven by new technology, evolving regulation and higher investor expectations. Firms that prepare now, with comprehensive Scope 3 data, sustainability-linked financing and next-generation data management, will be best placed to benefit. The foundation for all of it is a reliable, auditable emissions baseline for every portfolio company, which is what Manglai's carbon footprint software provides.
