Blog

The Future of Alternatives: ESG in Value Creation

by Chris Elvin

  • 26 Sep 2018
  • PE
  • VC
  • HF
  • PD
  • RE
  • INF
  • NR

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 Christopher Elvin, Head of Private Equity Products at Preqin.

 

ESG has been a hot topic in the alternatives industry recently, and Preqin’s latest fund manager survey results show that 83% of surveyed GPs believe that ESG will increase in importance over the next five years. Fifty-six percent of survey respondents already have an existing ESG policy, and a further 32% are in the process of implementing one. The proportion of fund managers that do not implement ESG practices in any of their investments is set to fall from 27% to 12% over the next five years, while the proportion of fund managers implementing ESG practices for every investment they make is set to increase from 42% to 58%.

The drivers of adopting ESG monitoring and reporting processes among fund managers today are predominantly ethical considerations (as cited by 85% of survey respondents), enhanced risk management (79%) and demand from LPs (73%). While fund managers believe these will remain significant drivers of ESG adoption in five years’ time, other factors will rise to the fore, such as best practice/competitive advantage (95%), regulation (93%) and potential for value creation (89%).

There has been some debate over the actual level of adoption of ESG practices among fund managers; however, a growing proportion are looking to implement and monitor ESG factors throughout their investment process. More than two-thirds of fund managers surveyed already consider ESG factors as part of their initial due diligence process. Significant proportions of managers that do not yet consider ESG in due diligence are, however, likely to do so over the next five years:19% are looking to introduce a requirement whereby portfolio companies must have ESG policies in place; 29% will document portfolio company compliance with ESG policies; and 31%intend to receive regular ESG reporting from portfolio companies.

The long-term investment nature of private equity is well suited to the monitoring and assessment of the impact of ESG factors on portfolio company performance. The growing focus on ESG is an illustration of the mindset of today’s fund managers to create value and maximize returns through the building of best-practice businesses.

Download your copy of the Preqin: The Future of Alternatives here.

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