ESG disclosures linked to better private equity fund performance

Private equity firms more transparent on ESG disclosures are more likely to invest in companies with good environmental performance and achieve higher financial returns, according to London Business School researchers.

Data showed that the greater the share of ESG disclosures within overall website disclosures, the better the private equity funds’ performance compared to funds with a weaker ESG focus (ESG Disclosures in the Private Equity Industry). Additionally, PE firms with one standard deviation more ESG disclosures produce, on average, a 4.9% greater net internal rate of return on their funds.

The findings on voluntary ESG disclosures spanning two decades were based on ESG-related keywords and disclosures across 75,000 websites of approximately 6,000 global private equity firms between 2000 and 2021.

Highlighting real-world impact, the study showed that PE firms that are more open about their ESG strategies target portfolio companies with lower environmental toxic releases. Regardless of ESG disclosure levels, the environmental performance of portfolio companies significantly improves in the year following a PE deal. Specifically, chemical releases at facilities owned or used by these companies were found to decrease by roughly 10% after the PE deal compared to pre-deal levels.

Environmental issues dominated the conversation at the start of the century, while social and governance issues-deemed less important- featured alongside each other. From 2008 onwards, environmental and social references started to be discussed separately from governance topics. However, the two themes converged between 2016 and 2018 when social issues gained dominance. Language around governance remained almost stagnant, rising slowly during this period. The number of ESG references and disclosures has risen relative to the general increase in the word count across all the websites studied.

Calling the research the “first large ESG sample evidence of its kind”, Florin Vasvari, lead author and academic director, Institute of Entrepreneurship and Private Capital at London Business School, commented: “This study is potentially questioning claims about greenwashing. Our data shows that PE firms seem serious about ESG and display better fund performance, suggesting that an ESG focus pays off, or that these fund managers are more capable overall, or a combination of both.”

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