LPs' commitment to ESG policies intensifies

The Preqin 2022 investor survey shows LPs are still solidifying their commitment to ESG, despite a perceived lack of data

Conventional energy’s high returns over the last year have encouraged some LPs to revisit their ESG-investing practices. Some US states’ legislatures, particularly Texas, have even gone so far as to require state public pension plans to divest ESG investment products. 

Despite this, a study conducted by Morningstar found state pension funds, including those in states opposed to ESG investing, still typically vote in favor of continued sustainability and ESG practices. The Biden Administration’s historic Inflation Reduction Act, the largest climate action legislation ever to pass in the US, also generated confidence in ESG. What's more, Preqin’s Investor Survey, completed in November 2022, shows greater LP commitment to ESG in the last twelve months. 

Investors exhibited a noticeable shift in opinion when asked how they would describe the change in their interest in ESG capabilities over the last 12 months. In 2022, 68% of respondents reported that ESG policies were held to average, considerable, or extreme importance, up from 58% in 2021 (Fig. 1). 

The survey displayed a similar pattern when investors were asked about the importance of ESG considerations when making an investment decision. The proportion who believe ESG considerations are extremely important more than doubled to 13% in 2022, from just 6% in 2021 (Fig. 2). Last year saw major commitments to ESG at the corporate level, chief of which being Blackrock’s support of sustainable investing, pledging to help achieve net zero emissions by 2050. 

These expanding promises by industry leaders are not the only signs of progress. The survey signaled a reduction among those who downplay the importance of ESG considerations. The response, ‘no importance’, dropped to 10% in 2022, down from 13% in 2021 (Fig. 2). Notably, the survey showed this commitment extends to actually turning down investments. 

Limited partners are becoming more willing to step away from investments or partnerships due to concerns over ESG standards. More than 71% reported that they would, or already have, backed away from investments that fail to meet ESG standards, up from 68% in 2021. While these responses show slight growth, the share that said it wouldn’t impact their decision dropped more significantly. In 2022, 28% of respondents claimed they wouldn’t walk away from an investment because of ESG concerns, less than the 35% recorded in 2021 (Fig. 3). Based on our survey, LPs are less willing to concede on ESG standards, perhaps due to a growing belief in ESG’s performance drivers. 

Following our survey, it was also clear that 27% of respondents believe ESG-focused funds exhibit better performance than non-ESG funds (Fig. 4). The percentage that believes these funds perform the same also shifted in 2022. Although investors were split between ‘better performance’ and ‘worse performance’ in 2021, the ‘better performance’ response now holds a slight lead. LPs have evidently become more confident that ESG funds offer better returns. This stance is consistent with ESG indices. A study conducted by MSCI, a real assets rating service, found that portfolios that integrated ESG investments performed the same, if not a little better, than portfolios that didn’t. 

LPs’ confidence, however, does not come without concerns, and 37% cited dissatisfaction with available data as a reason ESG issues would be of low importance. This response has risen by four percentage points over the last twelve months (Fig. 5). ESG pursuits should be working to assuage these concerns as investor demand remains the dominate catalyst for why investors believe fund managers establish ESG politics, according to 73% (Fig. 6) - well above ‘meeting industry demands/ best practices’ at 61%. 

ESG investing continues to be a contentious topic within the alternative assets space. As with all emerging sectors, debate remains surrounding the ability of ESG investing to deliver environmental outcomes. But amid this persistent scrutiny of ESG practices, LPs have strengthened their resolve and highlighted environmental issues as the most relevant issue for ESG investing into 2023.