The latest developments in the ESG space.
Preqin, a specialist in alternative assets data, tools, and insights, has published its annual environmental, social and governance report this week: ESG in Alternatives 2023. The report provides the latest insights within the private markets' sector covering developments in fundraising and fund size for ESG across geographies.
It shows that there has been a threefold increase in annual capital raised between 2020 and 2022, rising from $29 billion to $92 billion. Of this, Europe-based ESG funds are the most prominent, having secured over three quarters of aggregate capital, followed by 14 per cent in North America and 7 per cent in APAC. Recent years of fundraising growth have seen average ESG fund size dial up from $400 million in 2017 to closer to $600 million in 2022.
Whether ESG helps produce longer-term returns remains a
contentious issue. According to Preqin analysts, investors’ views
suggest there is no strong consensus either way. However, what is
clear is that ESG does affect investors’ willingness to do deals.
In Preqin’s most recent investor survey, conducted in November
2022, 29 per cent of investors surveyed reported having turned
down a deal over ESG concerns, while another 43 per cent reported
they would do so. While the upside benefits of ESG investing may
take more years to observe, it seems that investors consider ESG
as a means to manage downside risk, Preqin said.
Private equity vs infrastructure funds
Despite private equity having dominated ESG fundraising since 2014, the strong growth in fundraising in 2021 and 2022 meant that infrastructure funds secured nearly as much capital, the firm continued. $71 billion was secured by infrastructure funds compared with $75 billion secured in private equity. The infrastructure asset class is in a good position to deliver societal and environmental outcomes given its provision of essential services in support of economic development, the firm said. Managers in this asset class exhibit the highest average levels of transparency reflecting their need to engage multiple stakeholders in the development of infrastructure projects.
Impact strategies gain traction in North America
When it comes to the term ESG, some strategies do not sit easily within it. Impact funds are a pertinent example. While financial returns remain a central consideration in ESG funds, impact investing consciously acknowledges a trade-off between financial returns and ambitions to help organisations to accomplish specific goals that are beneficial to wider society or the environment. Therefore, it places positive external outcomes at the heart of the investment decision.
There has been a sizeable growth in impact fundraising across alternatives in recent years, particularly following the pandemic. Aggregate capital raised increased from $2.6 billion in 2019 to $33.6 billion in 2022. However, the regional breakdown of impact fundraising differs significantly from broader generic ESG funds. Whereas Europe-based funds dominate ESG fundraising, North American funds lead in impact, taking 59 per cent of aggregate capital raised since 2014 to May 2023, versus 37 per cent for Europe and 2 per cent for APAC funds.