ESG and capital: How sustainability is reshaping investment and financing
Sustainability performance has moved from simple reporting requirements to influencing how businesses access and attract finance. It's a shift that at HLB we see across markets, effectively changing the ESG conversation for mid-market businesses.
Financial institutions are building entire product lines around ESG targets, and private equity firms are using ESG data at every stage of the deal cycle. According to Morgan Stanley, 84% of investors expect the number of sustainable assets in their portfolio to increase in a couple of years.
Whether a company operates in a market with mature ESG regulation or one still developing its standards, the direction is the same: Sustainability credentials are inseparable from financial credibility.
Why investors are paying closer attention to ESG
Investors examine a business's ESG impact to gain a broader view of its operational health. Through that lens, they can identify three things:
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Long-term risk management: A study by ERM and Yale found that a growing number of investors expect to see climate change risks in companies' financial disclosures. In their eyes, ESG reporting serves as an early warning system for future risks. Businesses are expected to share energy transition plans, extreme-weather exposures, board involvement, etc.
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Climate transition and physical risks: As regulatory bodies introduce frameworks to build a low-carbon economy, investors are also embedding climate transition and physical risk assessment into their evaluation models. Companies that lag in this area may lose investor confidence or find that their business models are quickly becoming obsolete.
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Governance and transparency: ESG reporting (with third-party verification) is increasingly seen as a “front window” into a business’s strategy and health. Lenders and shareholders now scrutinise ESG disclosures for credibility, along with policies like executive pay, board diversity, and ethics.
Investors are factoring ESG performance into pricing, risk models, and portfolio construction. This change in priorities has given rise to a new generation of financial instruments built around sustainability targets.
The expansion of sustainable finance
Financial institutions are now launching sustainability-linked products based on ESG targets, including:
Sustainable finance products like these have really taken off. Sustainable debt issuance topped US$1.1 trillion in 2025, with green bonds owning almost 61% of all bonds issued. Meanwhile, SLLs made up almost 10% of all loan issuances in 2024.
Early SLL adopters were better positioned to negotiate cheaper terms with lenders. However, with the rise in greenwashing, lenders have established robust checks before issuing loans. By building the company around ESG requirements, mid-market businesses can prove their commitment to ESG.
ESG in private equity and investment decisions
In each step of the process, from deal sourcing to exit strategy, ESG can, and should, play a role:
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Deal sourcing: Firms can use ESG to identify high-quality targets and align with fund mandates. Some firms may specialise in a specific niche like renewable energy or recycling.
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Due diligence: Firms may require targets to report on ESG-specific metrics during the evaluation phase, like carbon footprints, supply chain practices, and employee policies.
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Value creation: Private equity firms will often advise businesses to build on their ESG activities, which will help the business expand its customer base and attract talent, making it even more appealing to buyers.
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Exit strategy: Companies with high ESG ratings often command higher valuations because they're viewed as lower risk and more resilient.
Private equity firms are standardising ESG frameworks to benchmark existing and future portfolio targets. They're requesting more structured, comparable ESG data during evaluation to ensure accurate assessments. Businesses that can respond to these requests with credible data are in a stronger negotiating position in transactions.
Implications for mid-market companies
As ESG grows in importance for investing and financing, mid-market businesses need to be aware of three changes that could affect their chances of securing funds:
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Inherited ESG requirements: Large corporations increasingly have contracts that contain ESG clauses. These provisions often require mid-sized businesses to supply greenhouse gas emissions data, demonstrate responsible sourcing, and commit to decarbonisation plans.
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Unavoidable sustainability clauses: In loan agreements, banks often include sustainability covenants to satisfy their own net-zero goals or regulatory guidance. Mid-market firms may need to report on ESG data to maintain favorable loan pricing and investment terms.
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Additional data requests: Asset managers and private credit funds may look for reporting standards that include information on energy use, waste management, or diversity statistics. This data allows them to measure portfolio risk through ESG lenses.
CFOs and finance leaders in mid-sized firms should prepare now for these scenarios by mapping value chain effectiveness, engaging suppliers on sustainability, and ensuring credible data collection. Arriving at funding conversations with the groundwork already in place better positions mid-market businesses to negotiate favourable terms and demonstrate long-term resilience.
ESG is now a financial imperative
Sustainability performance has transformed into a metric, like credit ratings and earnings projections, that investors and lenders weigh seriously. For CFOs and finance leaders, that makes it a core component of financial strategy. Companies with strong ESG credentials are more likely to secure favourable financing terms and greater access to capital as sustainability-linked investment continues to grow.
As ESG expectations continue to evolve, businesses that take a proactive approach will be better positioned to strengthen resilience and unlock long-term value. Whether you're developing your ESG strategy, improving reporting, or preparing for investor and lender scrutiny, HLB's ESG Advisory Services experts can help you navigate the changing landscape with confidence.
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