Investors double down on ESG

It is undeniable that we are experiencing the effects of climate change: extreme weather is tormenting the entire globe. From heat waves in London to fires all across Spain and Portugal and floodings in Sydney. Experts say that we should not look at how we can incorporate ESG into our investments but that we should start with ‘how we can address the current climate crisis as effectively as possible?’ and that targeted investments can be an answer to that.?

At the same time, data shows that LPs have higher demands towards GPs with regard to environmental, social and governmental issues, with some of them turning down funds that aren’t taking these into account enough. Below you can read five takeaways of the Private Equity International LP Perspectives 2022 study, in which investors have been asked several questions on the topic of ESG and their investments.?

1. 74% of LPs believe that adopting a strong ESG policy will lead to better long-term returns in their private markets portfolio
2. 20% of LPs have refused a fund investment opportunity based on a lack of diversity and inclusion at the GP level
3. ?The extent to which LPs ask private funds the following questions during due diligence: “Do you have an ESG consultant or team members in place to advise on responsible investing across your portfolio?”

• Sometimes (48%)
• Always (38%)
• Never (14%)

4. The proportion of LPs for which ESG factors have played a major role in rejecting fund commitments

• Europe (56%)
• Asia-Pacific (32%)
• North America (25%)

5. The aspect of ESG that has the highest weighting within LPs’ current ESG investments:

• Environmental (8%)
• Social (12%)
• Governance (49%)
• All equally weighted (31%)

It is no surprise that the importance of environmental, social and governance factors are being weighed more heavily by investors, especially in Europe. However, it is interesting to see that the ‘environmental’ category has the lowest overall weighting for most LPs. The big question on ESG remains: will this be enough? It will be in the hands of fund managers and LPs together to steer the market in a way that can positively shape the future.