Does Private Equity Ownership Make Firms Cleaner? The Role Of Environmental Liability Risks

Abstract

Private equity (PE) ownership leads to a 70% and 50% reduction in the baseline rates of two distinct measures of toxic pollution. Novel satellite imaging and administrative datasets from the oil and gas industry allow us to identify the reduction by comparing projects from PE-backed firms to their close geographical neighbors, which I show can be used as a valid counterfactual. Exploiting a novel natural experiment, I find that PE ownership's impact on pollution is negatively related to plausibly exogenous increases in regulatory risks, contrary to what either a non-pecuniary or technological upgrade channel would predict. Using specific PE deals from the energy industry, I find that PE control rather than the financing they provide is the main driver behind the results. Additional tests support the view that PE firms better monitor the management team and reduce the pollution of their portfolio companies to maximize both (1) long-term cash flows and (2) the exit value as cleaner assets trade at a higher price.

Keywords: Private equity, environmental externalities, climate finance, satellite data