There has been a three-fold increase in annual capital raised for environmental, social and governance (ESG) alternatives funds but there is no consensus amongst investors on whether ESG drives long-term returns.
Preqin, the alternative assets data provider, said in a report ‘ESG in Alternatives 2023’, that annual capital raised for ESG alternatives funds rose from $29bn to $92bn between 2020 and 2022. More than three quarters, 79%, of aggregate capital was raised by Europe-based ESG funds, followed by 14% in North America and 7% in Asia Pacific.
Whether ESG helps drive longer-term returns remains a contentious issue with no strong consensus either way in investors’ views according to the report. However, the majority of alternative investors surveyed in November 2022 have either already implemented, or intend to implement active ESG policies within the next 12 months (see graph).
“Infrastructure investors are ahead, with 52% already having active policies in place, reflecting the need to engage with multiple stakeholders during primary development and ongoing operations,” said Preqin. “For hedge funds, 50% of investors have no plans to integrate ESG policies, with some keen to keep their options open regarding trading conventional energy stocks that may conflict with any stated ESG ambitions.”
Infrastructure fund secured, $71bn, of aggregate capital, almost equal to the $75bn secured in private equity. Preqin said the infrastructure asset class is uniquely placed to deliver societal and environmental outcomes given its provision of essential services in support of economic development and that managers in this asset class also exhibit the highest average levels of transparency, reflecting their need to engage multiple stakeholders in the development of infrastructure projects.
ESG also affects investors’ willingness to do deals. In the survey nearly one third, 29%, of investors said they had turned down a deal over ESG concerns, while nearly half, another 43%, reported they would do so.
“While the upside benefits of ESG investing may take more years to observe, it seems investors consider ESG as a means to manage downside risk,” said the survey.
Alex Murray, VP, Head of Real Assets, Research Insights, at Preqin said in a statement that a re-focus on performance after a challenging 2022 may have encouraged some to de-prioritise ESG with fundraising so far in 2023 reflecting this.
Murray added: “However, impact investing is emerging as its own distinct market. Rather than retrenching as many had anticipated, ESG in Alternatives is increasingly diverse and sophisticated in what it can offer investors.”
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