Renewable energy and infrastructure account for a high proportion of ESG fundraising
July 3, 2024 (Preqin News) – ESG fundraising has picked up after a quieter 2023, although uptake differs by region and asset class, according to Preqin’s ESG in Alternatives 2024 report. On performance, Preqin data finds that at the broadest level, there is little difference between ESG and non-ESG IRRs.
ESG fundraising hit $55bn by April this year, rebounding from a fall in 2023. This followed a record 2022, where ESG fundraising of $163bn meant the share of total fundraising by ESG funds hit 14% of total private capital raised. Fundraising by ESG funds in the first quarter of 2024 accounted for 21% of the total.
Infrastructure’s share of ESG fundraising has also reached a new high in 2024, tracking at 44% at the end of April, with 13 funds closing and a combined total of $18bn raised. This asset class dominance is also seen in ESG mandates, with 20% of investor mandates with ESG criteria relating to infrastructure, despite it representing just 9.6% of alternatives AUM.
The number of ESG funds in market is also continuing to grow, with capital targeting infrastructure and private equity rising by 44% and 40%, respectively, in the first quarter of 2024. In infrastructure, 256 funds are targeting a combined total of $272bn, in part because of a backlog of funds caused by the slow market in 2023. In private equity, 271 funds are targeting $82bn.
Renewable energy proved resilient amid the difficult 2023, raising $70.2bn in both 2022 and 2023, and $19.7bn so far in 2024. In comparison, conventional energy funds raised $6.6bn in 2023 and $10.3bn so far in 2024, while mixed energy raised $14.4bn and $8.9bn. Infrastructure’s share of all renewable energy deals tends to be well over half, and so far in 2024 stands at 87%.
Increasing renewable energy capacity is a priority for many countries as energy security moved high up on the agenda following Russia’s 2022 invasion of Ukraine. At COP28 at the end of 2023, nearly 200 countries pledged to transition away from fossil fuels in a bid to reach net zero by 2050.
Interim results from Preqin’s June 2024 investor survey show that investors are more pessimistic about the ability of ESG-focused funds to outperform non-ESG-focused funds in 2024 than they were a year earlier, as just 9% of respondents believe ESG funds will perform better. Earlier, more positive views were likely a temporary effect driven by the strong growth in ESG fundraising between 2020 and 2021, the report said.
However, Preqin’s data shows that ESG and non-ESG funds perform similarly, with a mean IRR of 13.5% and 15.0%, respectively. Although this is not a statistically significant difference, the standard deviations of ESG and non-ESG funds do differ considerably, at 15.0% and 24.0%, respectively. The report suggests this may mean that ESG funds benefit from lower variance due to being able to better manage downside risk.
'The lack of transparency in private markets makes it harder to monitor ESG’s continuing dissemination,' said Alex Murray, VP, Head of Real Assets in Preqin's Research Insights team. 'Its fast emergence means investors – both established institutional investors as well as those new to alternatives – need educating on the underlying drivers.'
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.