| dc.description.abstract | 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. | en_US |
