Materiality in ESG: how to focus on what matters for your portfolio companies

Materiality in ESG is about prioritising the issues that matter most for a specific business. It is tempting to track every sustainability metric available, but a targeted approach makes sure resources go where they have the greatest effect on performance, risk and impact. In this article we look at why materiality matters in private equity, how to identify the core issues for each portfolio company and how to keep the assessment current as conditions change.

For practical examples of ESG creating value, see how private equity firms turn ESG compliance into profit.

What is ESG materiality?

In financial reporting, material information is information that could reasonably influence the decisions of investors and other users. Applied to ESG, it means focusing on the environmental, social and governance issues that substantially affect a company's long-term performance, reputation or licence to operate. Examples include carbon intensity for a manufacturer, workforce practices for a professional services firm or data privacy in technology. Our glossary entry on materiality in sustainability covers the concept in more depth.

Single or double materiality?

European regulation has broadened the concept. Under the CSRD, companies in scope apply double materiality: they assess both how sustainability issues affect the business (financial materiality) and how the business affects people and the environment (impact materiality). The revised ESRS adopted in July 2026 made the assessment more flexible, with a top-down approach, but kept it at the centre of reporting. The same two-sided view is now written into the Sustainability-Linked Loan Principles for choosing KPIs, so it is worth adopting across a portfolio even for companies outside the CSRD's scope.

Why materiality is crucial in private equity

Private equity managers oversee diverse portfolios spanning sectors and regions. Materiality:

• Keeps ESG relevant: efforts align with each company's business model and risk profile.
• Maximises impact: scarce resources are used where they make a difference.
• Streamlines reporting: dropping non-essential metrics makes disclosures more credible and less costly.

How to conduct a materiality assessment

Step 1: identify stakeholders

From employees and suppliers to local communities, customers, lenders and LPs, list the parties that influence or are affected by the portfolio company. A broad stakeholder map avoids blind spots.

Step 2: map potential ESG topics

Candidate areas might include:

• Climate change mitigation and adaptation (for example in agriculture or manufacturing).
• Supply chain ethics and traceability (for example in consumer goods).
• Cybersecurity and data privacy (for example in technology or healthcare).
• Workplace health and safety (for example in industrial operations).
• Nature and biodiversity (for example in real estate, infrastructure or food).

Step 3: prioritise

Use surveys, interviews or workshops to gauge each issue's importance to stakeholders and its potential financial effect. Scoring models or a materiality matrix help separate core issues from secondary ones. For how the results feed into comparable metrics, see ESG benchmarking in private markets: EDCI and beyond.

Aligning materiality with portfolio strategy

Once you have identified the key issues, build them into each company's value creation plan. If Scope 3 emissions turn out to be material, for instance, our step-by-step guide to Scope 3 shows how to turn that finding into an action plan.

• Set targets: define measurable KPIs for each material topic.
• Allocate resources: assign budget and people to address them.
• Monitor progress: put robust data systems in place, as described in our guide to modernising ESG data management.

Materiality is not static

Material issues shift with:

• Regulation: new disclosure rules, carbon pricing or product requirements such as digital product passports.
• Customer expectations: growing demand for lower-impact products and transparent supply chains.
• Technology: AI raising new privacy questions, or new abatement options changing what is feasible.

Review the assessment regularly and after major events such as acquisitions, expansions or leadership changes.

Pitfalls to avoid

• One size fits all: material issues differ even within a sector. Resist imposing identical priorities across the whole portfolio.
• Ignoring emerging topics: a seemingly minor issue, such as water scarcity in one region, can have major long-term consequences.
• Superficial engagement: genuine stakeholder consultation is essential. Do not rely only on desk research; talk to people.

Communication and transparency

Once you have identified and acted on material issues, keep stakeholders informed. Transparency strengthens reputation, meets LP expectations and builds trust with regulators.

• Reports and dashboards: progress on climate, workforce or governance metrics.
• Investor meetings: show how addressing material ESG issues supports the value creation thesis.
• Community engagement: communicate responsible local hiring or environmental restoration work.

To see how embedding ESG in company culture sustains these improvements, read creating a sustainability mindset in company culture.

Focusing on material ESG issues is central for private equity managers who want to optimise both financial returns and real-world impact. By systematically identifying and addressing the topics that matter, you protect investments from unanticipated risks and capture emerging opportunities. For most portfolios, emissions are on the material list from day one, and Manglai's carbon footprint software is designed to measure them consistently across every company.