Capital drivers, regulatory requirements, and opportunity-risk dynamics are increasingly prompting VC/PE firms to focus on and actively embrace ESG investing.

Capital-driven. Currently, asset owners and LPs—both domestically and internationally—are increasingly demanding that GPs demonstrate their systematic approach to managing ESG risks and opportunities. Meanwhile, with China’s ambitious dual-carbon goals and the growing development of its green finance framework, sustainable investing is set to become a key strategic direction in the country’s asset management sector. Regulatory provisions. Some local regulators and international ESG initiatives argue that failing to adequately consider ESG factors in relation to financial performance constitutes a breach of fiduciary duty. Moreover, as major global financial markets increasingly tighten their requirements for corporate ESG disclosures—and as regulatory frameworks for ESG-focused investments by financial institutions rapidly evolve—investment firms are poised to face even higher compliance demands in the future. Opportunity risk. More and more investors believe that ESG factors play a critical role in enhancing long-term investment returns, aligning perfectly with venture capital's long-term investment approach. At the same time, ESG considerations significantly influence corporate performance—and in the future, they are likely to become both a new barrier to market entry and a key competitive advantage.

Investment institutions also need to stay attuned to global and domestic ESG investment trends, as well as the emerging challenges and opportunities that come with them. Currently, on a global scale, regulators and asset owners are continuously introducing new requirements for fund managers regarding ESG investing, emphasizing the need to drive tangible implementation of ESG practices and enhance transparency in ESG initiatives. Additionally, climate issues have gained unprecedented attention, with more and more asset managers now committing to low-carbon strategies and even making zero-carbon pledges for their fund operations and investment portfolios.

"ESG Investment Approaches and Practices in the Fundraising, Investment, Management, and Exit Process"

Li Yixi

Due to their investment characteristics—such as focusing on long-term value creation in portfolio companies, emphasizing robust post-investment governance, and maintaining close relationships with the management teams of invested firms—VC/PE firms align perfectly with ESG investment principles, making them naturally well-suited to pursue ESG initiatives. In the broader trend toward ESG investing, actively embracing ESG practices has become a key indicator of an investment firm’s operational excellence.

Fund managers can integrate ESG factors into the practice of each stage—fundraising, investment management, and exit strategies. During the fundraising process, GPs need to pay close attention to LPs' ESG investment preferences and requirements, and should establish robust policy frameworks, investment strategies, and resource reserves accordingly. Moreover, a GP’s strengths in ESG investing will also help enhance its competitiveness during the fundraising phase. During the investment process, Private equity funds should also prioritize ESG investment research, carefully evaluating the ESG risks and opportunities of investee companies by considering their technological direction, R&D efforts, production processes, and business models. The ESG investment strategies employed in this assessment process typically include negative screening, positive screening, and ESG integration. In post-investment management activities, Private equity funds should embrace active ownership, leveraging their knowledge, expertise, and resources to drive sustainable growth in the companies they invest in. Upon exiting, Therefore, it is necessary to pay attention to how ESG issues impact the company's valuation.

"Key International Frameworks: Requirements for GPs Practicing ESG Investing and Their Assessment Methods"

Cao Wenjing

As ESG investing increasingly becomes the mainstream trend, numerous international institutions are actively developing ESG disclosure frameworks and standards. These increasingly accurate, comprehensive, and standardized global benchmarks are placing more stringent, substantive, and systematic demands on investment firms' ESG reporting processes.

For private equity firms, internationally recognized mainstream ESG investment guidelines and disclosure frameworks worth considering include those developed by the United Nations Principles for Responsible Investment (UNPRI). PRI Reporting Framework , developed by the Task Force on Climate-related Financial Disclosures (TCFD) The working group recommends • Developed by the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines • Developed by the Sustainability Accounting Standards Board (SASB) Sustainable Development Accounting Standards Etc.

"Empowering Carbon Management in Invested Companies: Seizing Opportunities and Managing Risks"

Zhao Junfeng

Climate change is a systemic issue, and the physical and transition climate risks faced by businesses can ripple through various channels—such as supply chains and trade networks—impacting all asset classes and economic sectors. For instance, corporate assets may be directly damaged by extreme weather events, disrupting production and creating operational risks for the entire industry chain. Additionally, companies could be affected by evolving regulatory policies and shifting industry standards in the global response to climate change.

On the other hand, tackling climate change is also driving industrial transformation, thereby creating new opportunities for businesses and investors. For instance, the shift toward clean energy will boost demand for minerals such as copper, zinc, and nickel—resources whose production hubs are more concentrated compared to oil and gas. Meanwhile, processing capacity within the supply chain has become notably concentrated in China. This reshaping of global supply chains could lead to emerging trade patterns, fresh business prospects, and exciting investment opportunities.

Investors are advised to focus on empowering companies from an ESG and low-carbon perspective, guiding their portfolio firms to align with broader policy directions, prioritize regulatory compliance trends, and proactively address the sustainability demands coming from downstream customers and capital partners in the supply chain.

"Conclusion"

In 2006, the United Nations Principles for Responsible Investment (UNPRI) was established under the joint initiative of the UNEP Finance Initiative (UNEP FI) and the UN Global Compact (UNGC), and has since become the world's most influential ESG investment initiative. As of October 2021, more than 1,600 VC/PE firms globally had joined PRI. As a critical component of the financial ecosystem, adopting ESG investing in private equity will also have significant positive ripple effects throughout their investment networks.