Private equity funds backing companies driving the net-zero transition are finally delivering returns on a par with traditional buyout strategies, signalling a turning point for ESG investing—a sector long shadowed by questions over whether impact comes at the cost of performance.
Climate funds with vintages between 2016 and 2021 delivered median returns on an absolute basis just a little above 15%, slightly better than funds dedicated to other sectors, per recent PitchBook data. This marks a dramatic shift from funds raised between 2008 and 2015, which have already liquidated or nearing expiration.
The spread between top and bottom decile IRRs for funds in 2016 and 2021 also narrowed to about 32 percentage points from 40 percentage points funds for vintages between 2008 and 2015, thanks to the better performance of bottom decile funds that no longer post negative returns. However, the median IRR is negative when compared to the two periods for other funds in the same vintage.
Young vintage funds are reaping the benefits of technology advancement, shifting consumer preferences for climate-friendly products and services, and stricter environmental regulation that did not exist when the industry was hit by the collapse of the so-called “Cleantech 1.0” that ended about a decade ago, around the same time when the 2015 Paris Agreement was signed, the Pitchbook report explains.
“Stricter regulations have translated to increased demand for many of the products and services offered by PE-backed climate companies, such as energy-efficient appliances and vehicles. The development of carbon pricing policies and emergence of carbon markets have also been a positive force for companies in the climate space for similar reasons,” the report says.
While the IRR improvement may ease the central debate in climate investing about whether prioritising sustainable outcomes sacrifices financial returns in recent years, the sector is now exposed to near-term policy risks—particularly in the US, where incentives for clean energy investments were rolled back in 2025, shifting the risk-return profile of some investments.
Some US fund managers that dialled back their ESG commitments under the second Trump administration have already started losing mandates with some of their biggest investors.
