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ESG Makes Inroads Into Private Markets

A third of global private capital assets is now managed with climate, diversity, and other non-financial goals in mind.

Investing with environmental, social, and governance goals is quickly climbing in private markets. 

Asset managers committed to ESG investing now oversee an aggregate $3.1 trillion, or 36 percent of the value of total global private market assets, as of October, according to a Preqin report released Wednesday. Notably, 49 percent of private debt strategies are dedicated to ESG, the highest proportion of any alternative asset class. The private debt figure is striking, given that managers of public fixed income strategies have been far slower to adopt ESG objectives than those who oversee listed stocks.

At the same time, ESG-committed managers brought in only 43 percent of the $950 billion raised so far in 2021. 

The research firm also noted that managers and allocators still struggle to integrate ESG metrics and goals into all of their investments. 

For private capital to be effective in the ESG space, challenges, such as greenwashing, must also be addressed. Preqin defines greenwashing simply: exaggerating the sustainability of a fund or investment, the report said.

“A lack of unified standards and definitions on ESG helps to facilitate greenwashing, making it harder to assess the quality and integrity of ESG commitments that fund managers are making,” the report said. “As the ESG industry evolves, so do its standards in terms of definitions, reporting metrics, and the language that is used.” 

For investors, the lack of uniformity can make it difficult to fact check the claims of private capital firms. Similarly, a lack of data about the sustainability of portfolio holdings can trip up managers that are looking to verify companies’ promises about ESG and sustainability.

To avoid greenwashing, the report documents a demand for more transparency and data.

“The focus lies on improving reporting standards in the industry, ensuring climate-related financial risks can be measured and managed, identifying commercial opportunities in the transition to net zero, and mobilizing private capital to developing economies,” the report said. 

The level of disclosure often depends on the size of the asset manager. According to the report, larger asset managers disclose more information about ESG, and the average ESG transparency metric becomes more robust as the funds’ assets increase. 

The authors noted that low disclosure does not equate to poor ESG practices at a firm, but it does indicate a dearth of resources, time, and data among asset managers. In the future, the report said market progression will come with investor and regulatory demands to “mandate ESG disclosures and standardize taxonomies around ESG opportunities.” 

There’s no question that private capital is the future of ESG, said Yury Yakubchyk, CEO and co-founder of Elemy, a privately held business-to-business platform that connects users with in-home pediatric healthcare providers. As a business with a socially-driven mission, Elemy has attracted high-profile investors, including Pershing Square’s Bill Ackman.

“The mentality that I’m detecting from investors is that, over the past few years, Silicon Valley has gravitated more toward mission-oriented businesses,” Yakubchyk told Institutional Investor. “Now, the financial and investment community is playing catch up. I’ve had investors point-blank tell me that if a company doesn’t have a mission that makes sense to their LPs, they’re not going to invest.” 

The Preqin report comes at a time when managers and institutional investors are facing increased pressure to commit to a net-zero target, another element of ESG. On Tuesday, former U.S. Vice President Al Gore and financier David Blood announced the formation of a new asset manager that will work toward net-zero solutions and contribute to a goal of limiting global temperature rises, according to a Reuters report

“The hope is that private sector investment will help fund the move to net zero, as well as the technologies that can help accelerate the process,” the Preqin report said. 

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