ESG Thrives in Alternatives Amid Return Focus
Preqin, the leading global provider of alternative assets data and insights, has released its annual ESG in Alternatives 2023 report.
The report offers valuable insights into the private markets, including fundraising trends, fund sizes, and regional breakdowns in ESG integration.
Notably, the report shows a significant three-fold increase in annual capital raised between 2020 and 2022, reaching $92 billion. Europe-based ESG funds have taken the lead, securing 79% of the aggregate capital, followed by North America at 14% and APAC at 7%. Additionally, the average ESG fund size has grown from $400 million in 2017 to nearly $600 million in 2022.
ESG's impact on long-term returns remains a topic of debate among investors, with no clear consensus. However, what is evident is that ESG considerations influence investors' decision-making processes.
According to Preqin's recent investor survey, conducted in November 2022, 29% of respondents reported rejecting a deal due to ESG concerns, while an additional 43% indicated they would do the same. Investors recognise ESG as a means to manage downside risks, even if the full extent of its upside benefits may take more time to materialise.
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Private equity funds have been at the forefront of ESG fundraising, but infrastructure funds have made significant strides in recent years. While private equity has historically dominated ESG fundraising since 2014, the growth in infrastructure fundraising in 2021 and 2022 resulted in infrastructure funds securing nearly as much capital as their private equity counterparts.
Infrastructure assets are uniquely positioned to deliver positive societal and environmental outcomes, given their role in supporting economic development. Transparency levels among infrastructure fund managers are notably high, reflecting the need to engage multiple stakeholders in infrastructure project development.
In North America, impact strategies are gaining traction within the ESG landscape. Impact funds represent a distinct segment within ESG investing, acknowledging a trade-off between financial returns and broader societal or environmental goals.
This conscious focus on positive external outcomes sets impact investing apart. The report highlights significant growth in impact fundraising across alternative investments, with aggregate capital raised increasing from $2.6 billion in 2019 to $33.6 billion in 2022. Notably, North American funds lead in impact investing, accounting for 59% of aggregate capital raised since 2014, compared to 37% in Europe and 2% in APAC.
Key other findings from the Preqin ESG in Alternatives 2023 report include the popularity of impact funds in venture capital, the fact that ESG funds have exposure to many different sectors, and the fact that ESG-related lawsuits are becoming more important, especially in industries that deal with fossil fuels.
Alex Murray, VP and Head of Real Assets Research Insights at Preqin, remarks, "This report arrives at a time when ESG faces challenges from vocal critics, while a refocus on performance may have temporarily shifted priorities. However, impact investing is emerging as a distinct market, and ESG in alternative investments continues to evolve, offering investors diverse and sophisticated opportunities."
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