As the alternative assets industry continues to grow, Preqin is launching an initiative examining the Future of Alternatives. In conjunction with key industry participants, we take a five-year look into the future to see where the market will be, what changes fund managers are planning for and how investors plan to invest in 2023.
This contribution is provided by Dmitri Sedov, Chief Product and Marketing Officer at Preqin.
The topic of ESG, or more specifically integrating environmental, social and corporate governance principles into investment strategies, has become one of the most talked-about areas of asset management across public and private markets in recent years, in keeping with the soaring demand from asset owners for impact and responsible investment alternatives.
Global Sustainable Investment Alliance estimates that ESG investing grew to $23tn in 20161 (the latest year for which data is available). And according to J.P. Morgan, nearly $2.5tn of funds now use “true” ESG metrics2.
In private markets, the UN Principles for Responsible Investment (PRI) reports that two of every three LPs consider responsible investment in their selection of fund managers, while Preqin’s data shows that nearly half of alternative fund managers will consider ESG principles in every investment they make by 2023.
Institutional finance has embraced this new reality, one where the assessment of ESG practices at the fund and asset level are among the key drivers of investment decisions. Such assessments are currently dominated by ESG ratings agencies, which score companies on a wide range of non-financial metrics.
However, a recent report by ACCF3, a pro-business think tank, spotlights inherent biases in ESG rating methodologies, mainly favouring the biggest companies or those domiciled in jurisdictions with stringent reporting requirements.
But what about everyone else? Enter private capital. By stewarding an ever-growing universe of companies, the private capital industry is uniquely positioned to bring greater transparency and information symmetry to ESG policies across the company spectrum, from start-ups to SMEs to unicorns. Through better data, disclosure and reporting, private capital will be a driving force in bringing ESG investing to light.
With that, here are our five predictions for ESG investing in 2023:
- All fund managers will be expected to have clearly articulated policies and procedures for addressing ESG risks and opportunities, putting greater focus on an asset/portfolio company’s license to operate.
- Disclosure regulations and tax incentives will help direct capital to more ESG-friendly investments…
- …but regulatory frameworks will fall short of becoming a global ESG standard, shifting the onus onto market-leading GPs to set the tone for the level of transparency in ESG disclosure and technology adoption to aid ESG reporting to their LPs.
- In private capital, ESG will become more polarized around “E” and “G”, casting light on managing environmental and climate-related risks and governance issues.
- Green and specialized ESG funds will proliferate, many seeking to meet growing demand from LPs for such “clear-cut” ESG investments.
1 - http://www.gsi-alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf
2 - https://www.jpmorgan.com/global/research/esg
3 - http://accf.org/2018/07/19/ratings-that-dont-rate-the-subjective-world-of-esg-ratings-agencies
Download your copy of the Preqin: The Future of Alternatives here.