ESG Integration in the European Priuate Equity Industry: Does ESG integration prouide superior risk-adjusted returns?
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- Master of Science 
Integration of sustainable investing in the financial sector has rapidly increased in recent decades. Private equity firms incorporate environmental, social, and governance (ESG) investment criteria as the metrics are gaining traction, influencing fund managers’ investment strategies. Referring to the investment period from 2016 to 2021, we classified 86 European private equity buyout funds based on three distinct ESG variables into four diversified portfolios. The portfolios are comprised based on the funds’ aggregate ESG score. Regarding geographic focus, we covered the Euro area to investigate whether risk-adjusted financial performance is affected by ESG integration in the private equity industry. We found that ESG funds generate less volatile returns in quarterly net IRR standard deviation than non-ESG integrated funds. This evidence favors ESG funds as a suitable investment class in terms of risk-adjusted performance. The outperformance did not depend on absolute return, as non-ESG integrated funds generated the highest absolute return. On the other hand, evidence suggests that ESG integrated funds outperform non-ESG integrated funds in terms of standard deviation and possibly beta risk, indicating that systematic risk is considerably lower. Through an empirical model, we have found that ESG integration positively and significantly impacts funds’ risk-adjusted performance in terms of the Sharpe ratio at the 10% significance level. Consequently, these results can be considered a general direction for long-term investors who are more interested in the capital allocation line than the security market line.
Masteroppgave(MSc) in Master of Science in Finance/(Financial Economics) - Handelshøyskolen BI,2022