PE Tech Report


Like this article?

Sign up to our free newsletter

ESG factors improve risk-adjusted returns and play important role in alt investment allocations

The majority of institutional investors actively consider ESG criteria when making alternative investment allocations, according to a survey by LGT Capital Partners and Mercer. 

The survey of 97 institutional investors in 22 countries, also found that most believe ESG improves risk-adjusted returns and is an important aspect of risk and reputation management. Titled “Global Insights on ESG in Alternative Investing,” the research focuses on why and how institutional investors incorporate ESG considerations in alternative asset classes.

According to the survey, ESG factors are actively considered by a large majority of institutions investing in alternative assets. More than three-quarters of respondents (76 percent) incorporate ESG criteria when investing in alternative asset classes.

Fifty seven percent of respondents believe that incorporating ESG criteria has a positive impact on risk-adjusted returns, while only nine percent think that it lowers them. 

Issues that have the potential to impact a company’s long-term risk, reputation or overall performance are viewed as significant. Topics such as carbon intensity, controversial weapons and bribery and corruption garner strong support, while exclusion criteria, such as alcohol or tobacco, are rarely considered. 

More than half (54 per cent) of institutional investors who incorporate ESG criteria into investment decision-making have done so for three years or less, which suggests rising expectations for investment managers over time. Greater clarity on techniques and strategies for ESG incorporation would help investors progress more quickly.
“CIOs, heads of asset classes and portfolio managers of large and small institutions from 22 countries clearly recognise the positive effects of ESG integration on risk-adjusted returns,” says Tycho Sneyers, Managing Partner and Chairman of LGT Capital Partners ESG Committee. “This shows that ESG analysis has moved beyond ethical concerns and has firmly found its place as a risk and investment management topic. Given the high rate of recent adoption of ESG and broad interest in the topic, we can safely assume that ESG integration will continue its rapid expansion.”
Deb Clarke, Global Head of Investment Research at Mercer, says: “It is encouraging to see investors becoming increasingly aware of the potential risks and opportunities these issues can present to portfolios. Incorporating ESG considerations into investment decisions strengthens a portfolio’s defence against risks arising from governance failures, changes in policy and regulation, and environmental and social trends. It can also put investors in a better position to take advantage of opportunities arising from a shift towards more sustainable economic growth.”

Like this article? Sign up to our free newsletter