ESG-linked carried interest mechanism

As the sustainable finance field matures, we are witnessing the emergence of new approaches, instruments, and mechanisms. One notable innovation is the ESG-linked carried interest mechanism used by private equity funds. This approach ties the general partner's compensation to ESG-related impacts, which are measured against specific, time-bound targets and key performance indicators (KPIs), with a focus on verifying the reported outcomes. This is a strong example of sustainability in practice, demonstrating the market's progress in aligning incentives and ensuring the achievement of ESG goals.

About the working paper

The original version of this paper was developed by ISFC in 2023. This updated edition includes the latest examples, market information, and additional research.

We plan to develop thematic papers on ESG-linked carry, exploring how remuneration schemes can align with ESG impacts, the role of the EU Sustainable Finance framework, and emerging best practices. We will also examine potential unintended consequences.