ESG Investing has left a mark on the private capital industry. In a report published ESG in Alternatives 2021: Navigating the Climate Crisis–Preqin, the global leader in alternative assets data, tools, and insights explores key issues faced by the alternatives industry.
Some of the key issues include implementing environmental, social, and governance criteria into investment practices, the impact of climate change on investments, how investors are approaching the issue of greenwashing, and how regulators are stepping up their efforts.
The desire to integrate ESG principles runs high with private asset investors and managers, as 76% of investors have seen an increase in demand for their organization’s ESG capabilities over the past 12 months, according to Preqin’s H2 2021 Investor Outlook survey.
However, implementing ESG policies has so far been a challenge for them due to a lack of data, unified standards, and common definitions. This makes it difficult to assess the quality of ESG investments, increasing the risk of greenwashing.
Private capital ESG AUM on the rise
Preqin’s ESG in Alternatives Report 2021 found that, as of October 2021, there are $3.1tn of private capital assets under management (AUM) by firms that are committed to ESG investing. This compares with $8.52tn of private capital AUM globally or 36% of the total.
Fund managers with established ESG policies are also responsible for a significant portion of total private capital fundraising. Preqin estimates that ESG-committed managers raised $403bn in the first nine months of 2021, compared to $506bn raised throughout 2020.
Debt is rising with a new asset class on the horizon
Preqin’s report also found that private debt has the highest rate of ESG commitment of any asset class, with 49% of its AUM committed to ESG. Private equity also pulls ahead with $1.82tn AUM focused on ESG funds, the greatest amount of all the alternative asset classes.
ESG commitments are at their lowest rate among infrastructure managers, at 31% of AUM.
Carbon emission trading is likely to prove a key component in achieving net-zero goals. It also means that carbon is likely to develop as an asset class, providing a new set of opportunities for private capital investors and fund managers.
Larger fund managers are pulling ahead
Last year, Preqin began to analyze LPs and GPs on the transparency of their ESG practices.
Based on Preqin’s 37 transparency indicators sourced directly from notable ESG frameworks such as the UN PRI, TCFD, The Sustainability Accounting Standards Board (SASB).
The Institutional Limited Partners Association (ILPA) the current median for global data disclosed sits at 5%, which equates to an average disclosure of four out of 37 indicators.
Based on this transparency metric, Preqin found those fund managers with AUM of $100bn+ have an average ESG transparency metric of 70%, which decreases as AUM gets smaller.
Furthermore, the average ESG transparency metric of the five largest managers by fund closures in the past 10 years was 86.5%, well ahead of the universal average of 12.0%.
LPs will need to know the specifics most important to them. As ESG-committed AUM continues to grow, the future for ESG in the alternatives industry will be a combination of client demand and regulatory pressures to push managers into prioritizing ESG.
ESG executive gives its verdict
Jaclyn Bouchard, Head of ESG at Preqin had the following insights.
“Over the years, the alternatives industry has come a long way in its understanding of ESG. With an increasing amount of time and money at stake, managers have focused on finding solutions to help them respond to institutional investor demand for ESG.”
“As the largest GPs are first to formally adopt ESG principles, the share of ESG committed funds in private markets will continue to grow from investor and regulatory pressures.”
“With that, market participants, no matter the size, will be expected to increase their ESG transparency to meet expectations and avoid the pitfalls of greenwashing.”
Preqin is incredibly proud to announce major updates to its ESG Solutions.
Preqin is the only product suite to provide private market participants with a 360-degree view of environmental, social, and governance (ESG) risk, impact and opportunity across LPs and GPs, down to portfolio and private company levels.
We have been developing and refining this solution for many months, including with the help of our ESG Council made up of global GPs, LPs, and academics representing £2.16tn in AUM.
“Together, we wanted to find answers to the biggest question in private markets — how do we correctly source asset-level private company ESG data?”
“The support, feedback, and industry insights of the ESG Council have proven invaluable to Preqin’s journey, helping us to create the solutions we can now offer today.”
“Preqin’s mission is to ensure every decision taken in alternative markets is a sustainable one.”
“With this expansion of our ESG Solutions product suite, we are now able to provide private market professionals with the data and insights they need to meet the expectations of their stakeholders, make informed decisions and take a data-driven approach to integration.”
Preqin’s ESG Solutions builds on its ESG Profiles, a solution that was launched in November 2020 and covers numerous ESG transparency KPIs, disclosures, and key contacts across more than 54,000 GPs and LPs to now also provide asset-level data on ESG risk and impact.
An assessment across 124,000+ private companies available on Preqin Pro, the alternative assets industry’s leading source of data and intelligence.
To make the best strategic allocations, both fund managers and investors need clear visibility of ESG at the asset level to identify, measure and manage the biggest exposure areas.
With private company risk scoring and sub-scoring drilling down to individual ESG factors such as greenhouse gas emissions, supply chain and employee health & safety.
Preqin’s ESG Solutions is the only product specifically developed to solve the private company ESG data gap. The full suite of ESG Solutions gives access to:
Comprehensive ESG transparency KPIs across 37,000+ GPs and 17,000+ LPs in alternative assets, including policies, practices, key ESG affiliation, memberships and contacts.
ESG Risk Evaluations
Risk Magnitude Scores down to the specific ESG factor for 124,000+ portfolio companies.
Estimates for positive impact potential across 124,000+ portfolio companies and 21,000+ funds and data for 50,000+ impact labelled portfolio companies and funds.