A new report published bg Preqin — ESG in Alternatives 2021: Navigating the Climate Crisis — reveals that, as of October 2021, there is USD3.1 trillion of private capital assets under management (AUM) by firms that are committed to ESG investing. This compares with USD8.52tn of private capital AUM globally, or 36 per cent of the total.
Fund managers with established ESG policies are also responsible for a significant portion of total private capital fundraising. Preqin estimates that ESG-committed managers raised USD403 billion in the first nine months of 2021, compared to USD506 billion raised throughout the whole of 2020.
Preqin’s report also found that private debt has the highest rate of ESG commitment of any asset class, with 49 per cent of its AUM committed to ESG. Private equity also pulls ahead with USD1.82 trillion AUM focused on ESG funds, the greatest amount of all the alternative asset classes. On the other hand, ESG commitments are at their lowest rate among infrastructure managers, at 31 per cent of AUM.
Carbon emission trading is likely to prove a key component in achieving net-zero goals. It also means that carbon is likely to develop as an asset class, providing a new set of opportunities for private capital investors and fund managers.
Last year, Preqin began to analyse LPs and GPs on the transparency of their ESG practices. Based on Preqin’s 37 transparency indicators — sourced directly from notable ESG frameworks such as the UN PRI, TCFD, The Sustainability Accounting Standards Board (SASB), and the Institutional Limited Partners Association (ILPA) — the current median for global data disclosed sits at 5 per cent, which roughly equates to an average disclosure of four out of 37 indicators. Based on this transparency metric, Preqin found that fund managers with AUM of USD100 billion-plus have an average ESG transparency metric of 70 per cent, which decreases as AUM gets smaller. Furthermore, the average ESG transparency metric of the five largest managers by fund closures in the past 10 years was 86.5 per cent—well ahead of the universal average of 12.0 per cent.
LPs will need to continue to ask their GPs the “right” questions and know what specifics are most important to them. As ESG-committed AUM continues to grow, the future for ESG in the alternatives industry will be a combination of client demand and regulatory pressures that will continue to push managers into prioritising ESG.
Jaclyn Bouchard, Head of ESG at Preqin, says: “Over the years, the alternatives industry has come a long way in its understanding of ESG. With an increasing amount of time and money at stake, managers have focused on finding solutions to help them respond to institutional investor demand for ESG. As the largest GPs are first to formally adopt ESG principles, the share of ESG committed funds in private markets will continue to grow from investor and regulatory pressures. With that, market participants — no matter the size — will be expected to increase their ESG transparency to meet expectations and avoid the pitfalls of greenwashing.”
