Untangling ESG in Private Equity: Do ESG Commitments Affect Target Firm Choice in LBOs?

Scholars have conducted various studies looking at the impact of ESG commitments on public market investors' investment strategies and portfolio compositions, but insights on Private Equity (PE) funds remain to be explored. The lack of transparency in PE and well-established ESG measurement tools pose significant challenges. This paper looks at 390 LBO transactions and the target firms' respective RepRisk ESG risk ratings to uncover whether buyout preferences shift towards lower ESG-risk firms once a PE fund makes ESG commitments. The results from this study find positive (increase in risk exposure) but insignificant effects on the ESG risk rating of new acquisitions post-commitment. Confounding due to factors such as time and industry are addressed, but the results exist under multiple data constraints. This finding might reflect a bias in the selected sample since the analysis may already be restricting it to firms with strong ESG ratings acquired by established PE funds.