Nearly 75% of private market investors are putting their money where their ethics are, with 29% rejecting opportunities due to ESG-related concerns.
This insight, revealed in Preqin’s ESG in Alternatives 2023 report, underlines the increasing emphasis on ESG strategies by alternative investors. The report found over half of private market investors have adopted an active ESG policy, or plan to within the year, with private equity, private debt, real estate and infrastructure investors being the most active.
Private markets’ ESG funds saw a sharp increase in capital raised from $29bn in 2020 to $92bn in 2022. However, there seems to be a slowdown in early 2023, mirroring wider trends in alternative investments. Private equity has been the dominant player in ESG fundraising, contributing nearly half of all capital raised since 2014. That said, infrastructure fund class is rapidly gaining traction, owing to its potential to effect societal and environmental change.
Average ESG fund size grew to $575m in 2022 from under $400m in 2017. However, Preqin predicts this growth to reverse as smaller funds adopt ESG integration. Even though overall fundraising has declined in 2023, the number of ESG funds is on the rise, indicating smaller fund sizes.
Impact investing is increasingly becoming mainstream, with capital raised for impact funds surging to nearly $34bn in 2022 from less than $13bn the previous year and just $2.6bn in 2019. While European investors have led ESG capital raising, North American investors have contributed the majority of impact fundraising.
Preqin’s VP, Head of Real Assets, Research Insights, Alex Murray, said, “This report comes at a time when ESG faces new challenges from increasingly vocal and politicised critics. Further, a re-focus on performance after a challenging 2022 may have encouraged some to de-prioritise ESG with fundraising so far in 2023 reflecting this. However, impact investing is emerging as its own distinct market. Rather than retrenching as many had anticipated, ESG in Alternatives is increasingly diverse and sophisticated in what it can offer investors.”
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