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ESG use by alternatives investors up 10% in three years

A clear majority (85%) of investors in alternative investments are integrating ESG criteria into their investment decisions, an increase of 10% points over the last three years, according to new research from LGT Capital Partners.

Climate change and human rights are seen as the most pressing issues among investors, while Diversity & Inclusion (D&I) has seen the largest increase in attention. Support for the UN Sustainable Development Goals (SDGs) remains strong.

LGT Capital Partners’ research surveyed 230 investors in alternatives (including pension funds, endowments and insurers across 28 countries) to assess how they are integrating ESG into their investment activities. This includes how investors are prioritising environmental, social and governance criteria, their use of the UN Sustainable Development Goals (SDGs), and the progress being made in the key areas of climate action and D&I.

According to the new survey, “The changing landscape of ESG and sustainable investing”, although environmental considerations have been a primary focus for investors for years, there has been a significant further increase in importance with 66% of respondents identifying this as the area that gets the most attention in their investment activities, an increase of 15 percentage points over the last three years.

A majority (52%) also now have policies in place to address climate change in their investment decision-making, with a further 36% planning to implement policies in the next two years. Europe is ahead of other markets on issues relating to climate change, with 63% of investors having policies already in place, compared to just 23% of investors in North America.
29% of respondents are now members of a net-zero initiative or have formally committed to reaching net-zero emissions in their portfolios, while 34% plan to enact policies in the next two years.

Within the “S” in ESG, for the first time human rights has been named by 23% as the most important social concern (versus 20% in 2019), whereas controversial weapons was the most important concern in 2019 with 22% (2022: 19%).

The largest gain in attention has been identified as D&I, which is up 5 percentage points from 2019, the largest rise of all concerns in the “S” category in ESG.

Over one-third (37%) of respondents have increased their efforts in D&I over the last year and almost half (48%) have formal policies in place. Notably, North America leads the way with 73% of respondents having D&I policies in place, compared to 45% in Europe and just 24% in Asia.

Some 55% of investors believe that Incorporating ESG considerations into investment decision-making positively affects risk-adjusted returns, an increase of 11% versus 2019, while 73% of investors believe ESG is relevant when appointing alternative investment managers compared to 54% in 2019. In 2019 47% were prepared to exclude managers based on ESG concerns, while 54% are willing to do so in 2022.

An overwhelming majority (92%) of investors believe that the UN Sustainable Development Goals help address pressing environmental and social issues, with 80% of respondents also believing that the SDGs help create new investment opportunities.

An increasing number of investors also assess the impact of investments on the SDGs: in Australia & New Zealand (2022: 32% vs 2019: 7%), Europe (2022: 25% vs 2019: 10%), and Asia (2022: 23% vs 2019: 8%) the efforts doubled or tripled, whereas in the US it remained stable at 7%.

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