ESG in Private Market Investments

Bart Heenk, Mar 26, 2021 2:06:29 PM

During my University days, a few years back admittedly, I derived huge enjoyment from my involvement in its debating society. One of the first and undoubtedly the most important lessons I learned was to pay attention to framing the motion. My chances of success would be significantly enhanced by being clear on terminology. This thought came to mind during a recent Avida International roundtable dedicated to the evaluation of current ESG thinking, with Dame Elizabeth Corley as our guest speaker. 

I was struck during the discussion by how thoroughly personal, and therefore varied, this phenomenon of ESG is. It seems everyone has their own personal definition of ESG. Likewise for organisations, who tend to apply them in a way that reflects a combination of their opinions, situations, and the degree of flexibility available to them. 

For institutional asset owners, reflecting ESG aspirations requires balancing the financial obligation to generate returns and to manage risks with the moral obligation to make investments matter for the future. Whilst the importance of the financial obligation remains a constant, the weight and meaning of the moral obligation can vary from sector to sector, country to country, and indeed from culture to culture. Should the focus be on climate change or diversity, on gender equality or on health? These are but a small sample of the multiple questions asset owners have to ask themselves. 

For financial service providers, success in attracting and retaining clients requires having information of sufficient depth and quality to deliver solutions that will allow asset owners to meet this balance of obligations and views. 

So, the emerging challenge facing asset owners is clear – ever more refined ESG requirements are becoming an increasingly important feature of RFPs. Therefore, success in forming new (and in maintaining existing) relationships will be hugely dependent on your organisation’s knowledge of clients’ evolving ESG requirements and the variety of views.

Growing interest in ESG in private markets

It should come as no surprise therefore that ESG considerations are showing up in private market allocation decisions. We know that the allure of potentially higher returns than traditional asset classes, combined with low correlations and predictable long-term cashflows has been steering investors towards alternative assets such as infrastructure, private debt, private equity and international real estate for some time now.

But what is less well appreciated, and emerges strongly from our market intelligence, is a likely increase in interest in ESG and sustainable solutions within private markets. Simply put, ESG and private markets in tandem offer an enticing prospect for growth within the finance industry. 

In-depth report

This market intelligence derives directly from a recent in-depth report we conducted to examine how asset owners are positioning themselves ahead of what we expect will be significant future growth in private markets ESG investing. 

The report consists of information gathered from 27 separate interviews with senior industry figures based in various European countries and concludes that sustainability is gaining momentum across most European markets. 

Whilst, unsurprisingly, climate change and energy transition are the most important themes, interesting differences can be observed across markets: 

  • Dutch institutions focus on the widest range of issues; 
  • French institutional clients are more focused on energy transition and social issues;
  • UK institutions focus primarily on climate change;
  • German institutions seem to be still exploring the subject and tend to ask for more generic solutions;
  • Swiss institutions are more focused on governance and environmental concerns.


But of most interest is the general feeling amongst respondents that it is no longer whether, but how to implement ESG in private market portfolios that is the key consideration… 

  • As far as infrastructure and private debt is concerned, the theme of climate change is most relevant.​
  • In the case of private equity (and real estate) other sustainability themes such as social issues, health, diversity, labour and governance are becoming hygiene factors going forward.

​ESG is here to stay, and its relevance extends far and wide, both within established practices and up-and-coming trends. ESG within private markets is a key concern for asset owners and managers, and its influence in both winning new business and maintaining old mandates should not be understated.

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(This article was originally published on Mallowstreet -- for subscribers only)


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