ESG Disclosures in the Private Equity Industry": London Business School Unveils Groundbreaking Research on Sustainability Practices

ESG Disclosures in the Private Equity Industry": London Business School Unveils Groundbreaking Research on Sustainability Practices

The London Business School has recently published a groundbreaking research paper titled "ESG Disclosures in the Private Equity Industry," shedding light on sustainability practices within the private equity sector. Authored by Florin Vasvari, Marcel Olbert, and Jefferson Abraham, the research provides the first systematic empirical insights into the Environmental, Social, and Governance (ESG) disclosures made by over 5,400 private equity firms.

Analysing ESG Disclosures

The study addresses critical questions surrounding the sustainability of the private equity industry, particularly its impact on the planet, stakeholders, and investors. The authors developed a novel measure of ESG disclosure by analysing data from private equity firms' websites over the past two decades. The research encompasses a representative sample of firms, offering valuable insights into the factors influencing ESG disclosure decisions.

Key Findings

  1. Increasing ESG Disclosures: The study reveals a significant rise in ESG disclosures over the past two decades. The prominence of ESG-related messaging on private equity firms' websites has consistently increased, contrasting with a decrease in disclosures about financial value creation.

  2. Geographical and Industry Influences: The geography and primary industries of portfolio companies significantly influence ESG disclosures. European firms outpace the United States in ESG disclosures, particularly in industries with higher environmental risks.

  3. Investor Perspectives: ESG-aligned investors, or limited partners, drive ESG disclosures by private equity firms. Investments by limited partners committed to the United Nations Principles of Responsible Investing led to a 12% increase in website-level ESG disclosures.

  4. Impact on Fundraising: ESG commitments positively impact fundraising outcomes. A doubling of ESG disclosures is associated with 15% faster fundraising, equivalent to approximately $100 million every six months.

  5. Translating Disclosures to Performance: The study affirms that ESG claims on private equity firms' websites translate into improved portfolio company performance. Strong environmental disclosures correlate with decreased environmental pollution, and enhanced social disclosures are linked to fewer inspections and reputational risks.

Methodology and Innovation

The research team employed a novel methodology, utilising textual analysis and a dictionary of ESG-related words to measure disclosures. The validity of the ESG measure was confirmed using the ChatGPT large language model to provide context.

Implications for the Industry

This research provides crucial insights into the voluntary ESG disclosures made by private equity firms, offering a more comprehensive understanding of their sustainability practices. As sustainability becomes integral to business considerations, the study encourages further examination of the industry's impact on ESG performance and the authenticity of disclosed information.

The findings also underscore the influence of investor perspectives, geographical factors, and industry considerations on ESG disclosures, urging private equity firms to align with global sustainability goals for long-term success.

Note: The paper is currently subject to second-round review.

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