ESG Disclosures in the Private Equity Industry

• Published date: 01 December 2024
• Author: JEFFERSON ABRAHAM,MARCEL OLBERT,FLORIN VASVARI
• Date: 01 December 2024
• DOI: http://doi.org/10.1111/1475-679X.12570

DOI: 10.1111/1475-679X.12570

Journal of Accounting Research

Vol. 62 No. 5 December 2024

Printed in U.S.A.

ESG Disclosures in the Private

Equity Industry

JEFFERSON ABRAHAM,∗MARCEL OLBERT ,∗

AND FLORIN VASVARI∗

Received 1 November 2022; accepted 19 July 2024

ABSTRACT

This paper offers the first systematic evidence on environmental, social, and

governance (ESG) disclosures provided by a large global sample of private

∗London Business School

Accepted by Valeri Nikolaev. The paper has greatly benefited from the thoughtful feed-

back from an anonymous reviewer and the associate editor. We acknowledge the generous

data support provided by Preqin and thank the Financial Accounting and Reporting (FARS)

Section of the American Accounting Association for the 2024 FARS Midyear Meeting Best Pa-

per Award. We thank Brian Baik, Aymeric Bellon, Jannis Bischof, Thomas Bourveau, Patricia

Breuer, Alper Darendeli, Svenja Dube (discussant), Stephen Glaeser, Nathan Goldman, Ioan-

nis Ioannou, Katja Kisseleva-Scherenberger, Kelvin Law,Jong Hyuk (Jay) Lee, Nico Lehmann,

Paul Mason (discussant), Maximilian Mueller,Max Pflitsch, Chhavi Rastogi (discussant), Peter

Severin, Eddie Watts, and Arndt Weinrich (discussant) for helpful comments. Wealso thank

seminar participants at the University of Colorado Boulder, Nanyang Technological Univer-

sity (NTU) Singapore, Singapore National University, the University of St. Gallen, the Univer-

sity of Miami, Boston College, the University of Cologne, Norwich Business School, the 2024

FARS Midyear Meeting, the LBS Private Capital Symposium 2024, the 2023 Oxford Sustain-

able Private Markets Conference, and the 2023 TRR Annual Conference for valuable feed-

back. Neha Kekre provided outstanding research assistance. We acknowledge the financial

support of the Institute of Entrepreneurship and Private Capital (IEPC) at London Business

School and the London Business School RAMD grant. Marcel Olbert acknowledges support

from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation)—Project-

ID 403041268—TRR 266 (Accounting for Transparency). Wemake publicly available our PE

firm disclosure data and information on U.S. facilities and their owner-company names from

the EPA’s TRI and OSHA data sets as well as companies covered in the Trucost database that

we matched to PE firms’ portfolio companies available in Preqin (https://marcelolbert.com/

data-and-code). The authors have no conflict of interest to declare. An online appendix to

this paper can be downloaded at https://www.chicagobooth.edu/jar-online-supplements.

1611

© 2024 The Author(s). Journal of Accounting Research published by Wiley Periodicals LLC on behalf of The

Chookaszian Accounting Research Center at the University of Chicago Booth School of Business.

This is an open access article under the terms of the Creative Commons Attribution License, which

permits use, distribution and reproduction in any medium, provided the original work is properly cited.

1612 j. abraham, m. olbert, and f. vasvari

equity (PE) firms. Using historical websites from 2000 to 2022, we develop

and validate a novel dictionary-based measure of voluntary PE firm ESG dis-

closures. Descriptive statistics reveal an increasing time trend in these dis-

closures, with social topics becoming as important as environmental topics

recently. Multivariate analyses show that the demand for ESG information

from fund investors is a significant determinant of PE firms’ ESG disclosures.

Leveraging data on PE firms’ portfolio companies, we document that more

PE firm ESG disclosures are associated with better ESG outcomes at the port-

folio company level, suggesting that voluntary ESG disclosures align with real

actions for the average PE firm.

JEL codes: G12, G32, G34, M41

Keywords: private equity; financial reporting; ESG disclosures; voluntary

disclosures; ESG investing; sustainable investment

1. Introduction

Whether companies operate sustainably and how investors can learn about

sustainability outcomes to make informed capital allocation decisions are

first-order economic questions. These questions have also become increas-

ingly important in the private equity (PE) industry, which currently man-

ages more than $7.6tn in global investor capital (McKinsey [2023]). Be-

yond its economic relevance as an alternative asset market, the PE industry

has unique features that motivate our study. First, PE firms manage capi-

tal on behalf of investors, or limited partners (LPs), that have become in-

creasingly focused on sustainability aspects. Second, in contrast to other

investment firms, PE firms hold significant equity stakes in portfolio com-

panies and can thereby directly influence sustainability outcomes. Third,

PE firms are typically not mandated to make detailed financial or sustain-

ability disclosures, and their portfolio companies usually provide little pub-

lic disclosures, except for limited mandatory financial statements if they

are based in Europe (Weitzman [2023]).1We study whether PE firms pro-

vide environmental, social, and governance (ESG) disclosures in response

to the information needs of LPs and whether these disclosures align with

ESG outcomes of PE firms’ portfolio companies. Todo so, we create a novel

and representative data set on PE firms’ voluntary ESG disclosures collected

from the firms’ websites over a period of 20 years.

Our first research question investigates whether PE fund investors’ (LPs’)

preference for sustainable investments influence PE firms’ voluntary ESG

disclosures. Ex-ante, it is unclear if LPs incentivize PE firms to provide

1As PE firms raise capital only from a sophisticated set of institutional and high net-worth

individual investors, regulators like the SEC traditionally did not think it was necessary to

impose a public disclosure mandate. This view is, however, changing. For instance, in a recent

2022 speech at the University of Chicago, SEC commissioner Caroline Crenshaw argued that

private firms, especially those backed by PE funds, should provide disclosures, in line with

their public peers to protect investors in the funds (SEC [2022]).

esg disclosures in the private equity industry 1613

voluntary public ESG disclosures because the role of an LP is unique and

understudied. In contrast to institutional investors who demand climate-

related information from publicly listed firms (e.g., Cohen, Kadach, and

Ormazabal [2023a]), LPs have access to robust private communication

channels with PE firm managers, potentially limiting the need for public

voluntary ESG disclosures (see appendix B).2

However, several reasons could explain why PE firms may provide vol-

untary public ESG disclosures in the context of their relationship with

LPs. First, in the early screening phase, not all LPs have access to private

communications and struggle to select PE managers in a large market with

thousands of firms. Thus, PE firms’ public voluntary disclosures of ESG

activities can reduce economically relevant adverse selection costs given

that over 70% of the LPs, representing nearly 76% of current PE assets

under management (AUM), adhere to investment policies with an ESG

approach (Bain & Company, ILPA [2022]). Second, voluntary ESG disclo-

sures can serve as a commitment device for PE firms, potentially reducing

reputational hazard, political intervention, regulatory oversight, or legal

risk for any unexpected breaches.3This commitment is likely critical in

our setting as PE firms predominantly manage closed-ended funds that

lock LPs’ capital for 10 years or more. Additionally, LPs such as pension

funds, university endowments, or government investment agencies need

to cater to their own stakeholders who often have ESG objectives. These

stakeholders benefit from public disclosures that allow them to verify that

their capital ultimately flows to high ESG performing investments. LPs

face challenges in providing this verification because they are restricted

from sharing their private communications with PE firms. Finally, PE firms

might disclose ESG information publicly as a strategy to lower the costs

associated with privately reporting to a diverse group of individual LPs,

each potentially requiring different ESG reports with varying frequencies.

Our second research question arises naturally as it is key to ascertain the

informativeness of ESG voluntary disclosures to their recipients. Therefore,

we ask if PE firms’ ESG disclosures align with the ESG outcomes of their

2This institutional aspect stands in contrast to the public equity setting where public re-

porting mandates for financial and often also ESG-related disclosures exist and differential

private reporting amongst investor classes is often explicitly restricted (e.g., Regulation FD

in the United States). Although the overwhelming majority of PE firms are private entities, a

small subset of very large PE firms is listed on stock exchanges. As we discuss in section 4.4, we

show evidence that their public listing status does not affect our inferences.

3Kreutzer [2011], Amel-Zadeh and Serafeim [2018], Cohen, Kadach, and Ormazabal

[2023a], or Bourveau et al. [2023] provide such evidence on public firms. Regulatory pres-

sure on PE firms has emerged recently. The European Union’s (EU) Sustainable Finance

Disclosure Regulation (SFDR) from March 2021 requires PE firms in the EU to provide sus-

tainability risk disclosures to their investors and more publicly on their websites. Similarly, in

May 2022, the Securities and Exchange Commission (SEC) issued proposed rules that require

PE firms employing ESG strategies to report additional information about those strategies to

the SEC and to provide more details to their investors (Investment Advisers Act of 1940).