The Villa skipper was taken off halfway through extra-time, shortly after Harry Kane had fired the Three Lions into a 2-1 lead.
Grealish had only come off the bench in the 69th minute and TV pundit Gary Neville later claimed being substituted would have been an “embarrassing moment” for the 25-year-old.
But Southgate insisted Grealish understood the reasoning behind the decision and had later informed him he “wasn’t bothered” after England reached their first major tournament final for 55 years.
The Three Lions boss explained how he opted to withdraw an attacking player to ensure his team held onto their advantage during the second half of extra-time.
“Denmark have had very clear strategies when they have been behind. They have thrown everyone forward,” said Southgate.
“We needed to keep pressure on at the front but to have numbers there to deal with balls into the box.
“In the end, Raheem (Sterling) was causing so many problems it was going to have to be Phil or Jack to come off.
“We made that decision, not an easy one, but Jack has totally understood it. In the end he said to me he is not really bothered, we have got to the final!
“I have to say he had exactly the kind of impact we were looking for when he came on. “Bukayo (Saka) had settled into the game and was playing well but we felt Jack could give us more. All of those attacking players, with Harry as well, gave a fantastic contribution.”
Southgate’s use of Grealish during Euro 2020 has been a regular talking point, with Wednesday night the Villa man’s fourth appearance of the tournament and third off the bench.
Neville, speaking on ITV after the match, praised Southgate for his brave decision but thought Grealish would have been disappointed.
"There’s been moments before games in this tournament where Southgate has been questioned and he would have been battered if it had gone wrong,” he said.
"Trippier in the first game, not playing Grealish enough, against Scotland the system people thought was too defensive.
"He doesn’t allow anyone to get carried away, he makes decisions that have been made to make the team successful.
"Jack tonight has suffered, and it’s an embarrassing moment for him in the sense that no one likes it, but he will recognise that it was the right thing for the team."