Sustainable Barbarians: The Role of Private Equity and Venture Capital on ESG Performance

ABSTRACT This study explores how private equity (PE) and venture capital (VC) sponsors influence the environmental, social, and governance (ESG) performance of their portfolio companies. Using data from 616 firms that went public from 2015 to 2022, the research work analyzes the changes in ESG ratings 2 years after the Initial Public Offering (IPO) and before the PE and VC exit. The results reveal a heterogeneous impact: PE‐backed companies tend to improve the overall ESG scores more significantly, mainly driven by environmental metrics. At the same time, VC‐backed firms display steadier progress in governance practices. Notably, companies with lower initial ESG ratings see the greatest improvements, thus supporting a risk management view, with no negative effects on financial performance, i.e., sustainability achievements do not come at the expense of value creation. Findings are consistent across various models and robustness tests, highlighting the potential for private market investors to drive ESG improvements, especially in companies with weaker sustainability profiles. The study emphasizes the importance of aligning investment policies with strong ESG commitments in PEs' and VCs' portfolio companies and suggests that active ownership strategies can enhance ESG results and preserve firm value.