ESG integration in pre-investment decision-making: a private equity perspective from South Africa’s manufacturing sector

Abstract

This study investigates how private equity (PE) firms in South Africa interpret, prioritise, and integrate Environmental, Social, and Governance (ESG) factors during the pre-investment phase, with a focus on the manufacturing sector. Drawing on qualitative interviews with PE professionals, it examines the mechanisms, drivers, sector-specific dynamics, barriers, and trade-offs that shape ESG decision-making. The findings reveal a hybrid integration model, where global standards are adapted through local governance norms, firm-level tools, intuitive heuristics, and pragmatic judgement. ESG integration is primarily driven by legitimacy demands from limited partners (LPs), particularly development finance institutions (DFIs), as well as regulators, and is frequently prioritised as a condition for capital access. Key barriers include limited internal capacity and portfolio-level gaps in ESG awareness, skills, and expertise, as well as inadequate infrastructure to collect and interpret ESG data. These constraints are compounded by the ongoing tension between ESG priorities and financial return expectations, particularly in the manufacturing sector, where firms must navigate sector-specific materiality under internal capacity limitations. While the financial value of ESG integration has not yet been fully realised at exit, firms anticipate firms anticipate that it will generate longterm financial benefits. The study contributes to literature by framing ESG integration as a strategic, interpretive process shaped by stakeholder expectations, institutional norms, and contextual realities in emerging markets.