PRIVATE EQUITY AND CARBON EMISSIONS: AN EMPIRICAL EXAMINATION

Abstract

Extensive literature documents a negative relationship between the level of carbon emissions and the market value of public firms. This paper examines the relationship between carbon emissions and the private equity (PE) industry. Using the exit multiple of PE deals and leveraging the PCAF emission factor database to estimate the carbon emissions of portfolio companies, we find a carbon premium for lower unscaled Scope 2 emissions of portfolio companies. This premium is not influenced by the size of the PE firm or the institutional pressure on the PE's home country, but significantly increases when the PE firm is an ESG Investor, defined as a UN PRI signatory. Furthermore, we find that larger PE are more likely to invest in lower carbon intensity companies. Greater institutional pressure in PE’s home country is associated with higher carbon emissions. We find no evidence that PE ESG investors hold portfolio companies with better carbon emissions performance. By providing evidence of a carbon exit premium, our results highlight the importance for PE investors to reduce the carbon footprint of their portfolios and commit to sustainable investing. We also raise concerns about the effectiveness of regulation and environmental initiatives, emphasizing the need for robust evaluation mechanisms to ensure the alignment of PE actions with sustainability commitments, mitigating the risk of greenwashing.