Preqin, a specialist in alternative assets data, tools, and insights, has published its annual Environmental, Social, and Governance (ESG) report – ESG in Alternatives 2022: The Transparency Tipping Point – which reveals that 42% of AUM across private capital currently, is managed in funds that employ an active ESG policy.
The report provides the latest insights on developments in what is becoming a necessary competency for private markets managers that want to meet the growing expectations of investors toward evidencing ESG integration.
Investors are a key push factor in ESG uptake in private markets, as managers look to deliver against Limited Partner (LP) preferences for ESG adoption. Preqin’s most recent 2022 H1 Investor Outlook – which was informed by more than 350 LPs investing across alternative assets – found a quarter (25%) of those surveyed reported having turned down an investment opportunity because of ESG standards, with a further two in five (39%) saying they would be prepared to do so.
The H1 2022 Investor Outlook also revealed that nearly three-quarters (72%) of investors believe fund managers are adopting ESG policies because of pressure from existing and prospective LPs. This factor is well ahead of alternative drivers such as industry standards or best practices (cited by 48% of LPs), political pressure (36%), regulatory demands (25%), or outperformance (14%). Although political pressure was only at 36%, this driver climbed from seventh most important factor to third over the past year.
The survey also found that 37% of investors in alternative asset classes have an active ESG policy in place. Private equity investors are in the lead, at 43%, followed by private debt and infrastructure, at 39%. Hedge fund investors (30%) trail the field for the second successive year.
As of October 2021, Preqin has tracked $4.37 trillion of private capital assets under management (AUM) managed by firms that report being committed to ESG investing. This represents 42% of total private capital AUM ($10.3 trillion).
Infrastructure boasts the highest share of AUM within ESG-committed funds, at 64%, driven by the longer social contract required to develop and operate public infrastructure. Private debt is close behind in terms of AUM share in ESG committed funds, at 59%. This high result is partly down to its relatively recent emergence as an asset class, just as attention on ESG was growing. At the other end of the risk spectrum, private equity and venture capital (PEVC) has the highest aggregate value of AUM in ESG-committed funds at $2.26 trillion, but the lowest share of any asset class, at 34%.
Looking at our growing mandates data, infrastructure ESG applicable mandates are overrepresented. Whereas infrastructure has less than 15% of the AUM of PEVC ($955 billion for infrastructure vs $6.6 trillion for PEVC), of mandates applicable to ESG, infrastructure accounts for just over 20% of the total, vs 26% for private equity.
Investors are asking General Partners (GPs) to report their ESG commitments, and driving demand for higher quality, more granular data to demonstrate how their portfolios are delivering on their own commitments towards delivering ESG outcomes.
