[Part 4 of Our Fund Series on Operationalizing Sustainable Finance]

In this final installment of our Fund Series, we tackle a question that has become central for fund managers navigating today’s evolving investment landscape:
Can ESG data actually improve financial performance and if so, how?

It’s a fair question. In recent years, ESG has too often been relegated to the compliance corner—treated as a reporting burden rather than a strategic lever. But as the market grows more complex and risk-laden, ESG is proving indispensable. When supported by high-quality, decision-grade data, ESG becomes a tool for mitigating non-financial risk, uncovering operational inefficiencies, and identifying value creation opportunities that traditional financial metrics can’t capture on their own.

Put simply: ESG data doesn’t just tell you how sustainable a company is—it tells you how resilient, efficient, and forward-looking it may be. For funds operating in private markets, that insight translates directly into investment returns.

ESG as Risk Intelligence: Why It Belongs at the Heart of Fund Strategy

One of ESG’s most critical dimensions is its ability to reveal non-financial risk, the kind of risk that increasingly drives value in a world shaped by climate disruption, regulatory change, stakeholder activism, and geopolitical instability. According to research by MSCI, ESG leaders tend to experience lower downside risk, reduced volatility, and better long-term earnings stability than their peers.

Private equity and venture capital firms are uniquely exposed to these non-financial risks. Unlike public markets, where investors can quickly rebalance portfolios, PE and VC firms must actively manage risk within their portfolio companies over multi-year horizons. That makes early detection and mitigation of ESG issues not just helpful—but essential.

Examples of these risks include:

• Climate transition risk: Exposure to carbon pricing or stranded assets in energy-intensive sectors

• Social and human capital risks: Talent attrition, DEI failures, or labor disputes that impact productivity and reputation

• Governance gaps: Weak board oversight, cybersecurity vulnerabilities, or opaque decision-making

• Regulatory exposure: Inability to meet disclosure or due diligence requirements under regimes like SFDR or the EU Taxonomy

What’s critical is that these risks rarely show up in quarterly financials until it’s too late. ESG data, when integrated into fund operations, functions as an early warning system.

Recent analysis by Morningstar Sustainalytics adds a deeper layer of evidence. The study tracked the performance of S&P 1500 companies from 2019 to 2025 across five ESG Risk categories, from Negligible to Severe during major periods of market stress, including COVID-19, the start of the Russia-Ukraine war, and the introduction of U.S. tariffs.

Firms with lower ESG Risk scores not only outperformed during stable periods but also demonstrated stronger downside protection during times of heightened volatility. A 5-point reduction in ESG risk score was linked to an annual increase of nearly 1% in excess returns, adjusted for market conditions. Importantly, these companies exhibited lower overall volatility and more consistent performance, even amid geopolitical and economic shocks.

This reinforces a key point: ESG risk is financial risk. And the better funds can measure and manage it, the stronger their resilience.

The Financial Market Is Already Rewarding ESG

Empirical studies increasingly show that markets are not only acknowledging ESG performance, they are pricing it in.

According to a global study by NYU Stern analyzing over 1,000 peer-reviewed papers, 58% of corporate ESG efforts are associated with improved financial performance, particularly when those efforts are material and strategic. MSCI research shows that companies with stronger ESG characteristics benefit from lower cost of capital and exhibit greater financial resilience. Morningstar data confirmed that firms with lower ESG risk scores delivered more stable returns and lower drawdowns over multi-year horizons. Firms with strong ESG profiles also benefit from tighter credit spreads and fewer severe credit events, particularly in fixed income markets.

A Bain & EcoVadis study analyzing nearly 100,000 mostly private companies found that ESG leadership correlates with stronger financial performance. Companies in the top quartile for executive gender diversity grew revenues ~2 percentage points faster and delivered ~3 percentage points higher EBITDA margins than their peers. Sustainable supply-chain practices delivered margins 3–4 points above average, while firms with high employee satisfaction saw 5-point higher 3-year revenue growth and margins up to 6 points greater.

All of this matters not only for direct returns, but also for fund valuation, LP attraction, and exit strategy. ESG is no longer a tradeoff, it’s a competitive edge.

Why Data Quality Is the Missing Link

Still, not all ESG strategies yield results. The difference lies in data quality—its structure, accuracy, timeliness, and materiality.

Too often, funds rely on ESG data that is:

• Self-reported and unverified

• Collected infrequently or inconsistently across the portfolio

• Limited to high-level, generic indicators that don’t reflect sector context

This kind of data may suffice for ticking regulatory boxes, but it doesn’t drive action. In contrast, decision-useful ESG data enables funds to:

• Detect material risks before they become value-destructive

• Benchmark portfolio performance in a comparable and actionable way

• Identify operational inefficiencies and improvement levers

• Engage companies more effectively through targeted ESG plans

It also positions the fund to articulate a coherent ESG narrative to LPs and buyers, demonstrating not just values, but value.

Materiality Matters: Choosing the Right KPIs

Collecting ESG data is only the first step. Just as critical is choosing the right KPIs, tailored to each portfolio company’s sector, geography, business model, and growth stage.

While common metrics like GHG emissions, board diversity, or employee turnover offer important insights, they’re not always the ones that matter most. In high-growth tech, for instance, data privacy, cybersecurity, and workforce wellbeing may be far more material than Scope 3 emissions. For a manufacturing firm, circularity and supply chain traceability could be key to both compliance and cost optimization.

Fund managers must assess materiality not just to meet standards like SFDR, but to understand where real risks and opportunities lie. That’s where ESG becomes strategy.

The Fund-Level Advantage

For funds, ESG data is not just about portfolio monitoring—it’s about portfolio orchestration. Standardized, high-quality ESG data enables:

• Thematic analysis across companies

• Capital allocation decisions

• Exit planning

It also helps fulfill emerging LP expectations. More limited partners are demanding ongoing ESG reporting and proof of alignment with frameworks like SFDR Article 8 or 9. A strong ESG data backbone allows funds to meet these demands without retrofitting their processes each year.

From Compliance to Performance: The Future of ESG in Private Markets

As scrutiny intensifies and capital becomes more selective, the ability to manage ESG in a structured, evidence-based way is no longer optional—it’s a competitive necessity.

Funds that succeed in ESG will not be those that check the most boxes, but those that treat ESG as a dynamic source of insight. With the right data, ESG becomes a mechanism for:

• Reducing risk exposure

• Improving operational efficiency

• Enhancing reputation and buyer readiness

• Unlocking new value creation levers

The message is clear: ESG isn’t just a reporting exercise—it’s a strategy for building stronger, more future-ready companies in a rapidly changing world.

About Atlas Metrics

At Atlas Metrics, we enable fund managers to turn ESG from obligation to opportunity. Our platform helps funds collect high-quality ESG data across their portfolio, benchmark performance, and report confidently to LPs, regulators, and buyers. Reach out to learn how we support ROI-driven sustainable finance.