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ESG defies critics as private markets funds size surge

Despite a vocal anti-ESG movement, research shows a significant increase in capital raised for private markets ESG funds.

By Adrian Murdoch

Private markets, Preqin, ESG
Building green private markets. Alternative ESG funds are finding favour with investors. (Photo by Mate Karoly via Shutterstock)
  • Capital raised for private markets ESG funds tripled between 2020–22 from $29bn to $92bn.
  • ESG remains a key consideration for investors, with 29% rejecting deals due to ESG concerns and 43% planning to do so in the future.
  • Global capital raised by impact funds more than doubled from $12.7bn in 2021 to $33.6bn in 2022.

There is significant concern that fund managers are losing interest in ESG. As asset managers chant fiduciary duty and large energy corporations scale back ambitions to cut the production of fossil fuels with seemingly little kickback, it’s hard not to agree. Earlier this week, one British national newspaper went as far as to call it “snake oil” that was “losing its potency”.

But the latest report on alternative investments from data provider Preqin shows that beneath the storm and fury, capital raised over the past few years for ESG funds has risen dramatically.

“Rather than retrenching as many had anticipated, ESG in alternatives is increasingly diverse and sophisticated in what it can offer investors,” says Alex Murray, Preqin’s head of real assets and the lead author of the report that focused on the private markets.

From 2020 to 2022, there was a three-fold increase in annual capital raised for ESG funds, growing from $29bn to $92bn. More to the point, there has also been an increase in average fund size. These have risen from $400m in 2017 to $600m last year.

What comes through loud and clear in the report is that investment firms are increasingly seeing ESG as a risk management tool. So, while there is no strong consensus on whether ESG helps drive longer-term returns, it is still a key motivation in whether investors do deals or not.

In the firm’s investor survey in November last year, almost a third of investors (29%) said they had rejected a deal because of ESG concerns, while 43% said they would do so in the future.

“While the upside benefits of ESG investing may take time to materialise, it seems investors consider ESG as a means to manage downside risk. As regulatory regimes are set to tighten in the coming years, the role of ESG in protecting asset values from stranded-asset risks remains,” the report says.

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Anti-ESG movement

All good news, but there remains what the report calls a “vocal and ardent anti-ESG movement”, especially in the US.

This point of view was denounced by Larry Fink, chief executive of BlackRock ($10trn AUM), speaking at the weekend at the Aspen Ideas Festival in Colorado. He said that he no longer uses the term ESG because it had become “weaponised” and “misused by the far left and the far right”.

Last year, Florida Governor Ron DeSantis pulled $2bn of state assets managed by the firm over its ESG investment policies.

“I need partners within the financial services industry who are as committed to the bottom line as we are – and I don’t trust BlackRock’s ability to deliver,” huffed the Florida chief financial officer and treasurer of the state, Jimmy Patronis, at the beginning of December.

Florida has been the most high-profile nay-sayer state over the past year, but the likes of Kentucky, North Carolina, Ohio and Texas have also threatened to divest from fund managers that commit capital under ESG-risk-management standards. There have already been a number of court cases.

US President Joe Biden has been quietly ignoring the manufactured outrage. At the beginning of June, his administration asked a judge to throw out a Republican lawsuit that would block state retirement funds from considering socially conscious investments.

The argument that Democrat lawyers used is precisely the one articulated in the Preqin report. There, Marcie Frost, chief executive of the California State Teachers’ Retirement System (CalSTRS), the second-largest pension scheme in the US, emphasises: “Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology”.

She said that rejecting ESG would be like putting on blinders, ignoring information and data that was material.

Impact investing

Republican ESG temper tantrums will undoubtedly continue, but they have not had an effect on impact investing.

It is, as Murray says, “emerging as its own distinct market”. Aggregate capital raised for impact funds increased from $2.6bn in 2019 to $33.6bn last year, according to the report. In 2021, the number of funds grew by 61% and the final close amount by 26%. But even though the number of funds decreased by 35% last year, the aggregate capital raised more than doubled from $12.7bn in 2021 to $33.6bn in 2022.

“This capital concentration in 2022 suggests impact strategies have moved mainstream, rather than being the preserve of smaller, niche managers,” the report says.

While the ESG fund landscape is dominated by Europe, North American funds lead in impact, making up 59% of aggregate capital raised between 2014 and May 2023, against 37% for Europe and 2% for APAC funds.

New York-based non-profit Global Impact Investing Network (GIIN) estimates the size of the current impact market stands at around $1.2trn in AUM and that there are clear tailwinds for continued growth.

It is likely to come from the US, Preqin believes. The $369bn stimulus package for investment in energy security and climate change from the Inflation Reduction Act should “increase the pool of capital for impact fundraising given the heightened environmental ambitions,” the report says.

The obituary for ESG is being written with ever-more frequency, and yet investors continue to vote with their capital. The link between ESG and profitability has long been established. This has nothing to do with ideology and everything to do with higher revenues, stronger profits and greater access to finance.

At the weekend, BlackRock’s Fink almost plaintively said his annual letters to chief executives are written to “identify long-term issues to our long-term investors”. Whether it is called ESG or impact investing, it doesn’t matter. Companies that don’t pay attention to ESG are going to see their profits fall.

[Read more: Will ESG investing survive a growing backlash?]

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