Barbarians at the Gate or Angels at the Crossroads? Examining the Impact of the UK Green Taxonomy on Private Equity Firms

This Article explores whether the UK Green Taxonomy will foster
sustainable corporate governance in private equity-backed portfolio
companies. We explore how the Taxonomy will address the greenwashing
problem that plagues financial markets, including the private equity industry.
Our analysis suggests that general partners will have a twofold response to
the new reforms. In the short term, they will seek to address the social
concerns of limited partners by negatively screening unsustainable
companies and cherry-picking more sustainable ones (the so-called “exit”
strategy). In the long term, however, they will adopt a dynamic strategy to
transform unsustainable targets into sustainable enterprises on exit (the socalled “voice” strategy). We explain these findings through the lens of law
and economics and show that competitive pressure and better integration of
sustainability in market pricing shape this dynamic. Lastly, we advance a
policy proposal that can further incentivize engagement on environmental
sustainability issues.