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ESG in Private Capital Survey 2023

Leading with impact: ESG value creation propels UK private markets

Welcome to our ESG in Private Capital Survey 2023, where we explore UK-headquartered private asset investors’ progress as they integrate Environmental, Social, and Governance (ESG) factors into their investment process.

Our aim is to shed light on the challenges they face and uncover the considerable opportunities ESG offers them.

An in-depth survey and interviews have revealed a resolute commitment among UK private market investors to incorporate ESG considerations into their investment decisions. However, their approaches to ESG integration differ. Limited Partners (LPs) and General Partners (GPs) have different views on how best to define outcomes and measure success, as well as on the approach to management of ESG risks.

We found five key barriers to ESG integration. They relate to data and reporting, benchmarking, securing the right talent, aligning with key stakeholders, and demonstrating value creation. These challenges, in particular for smaller firms, present obstacles for firms trying to navigate the ESG landscape successfully.

UK private market funds seeking ESG or impact investments have experienced a decade of growth and expect to continue to grow

£111 billion-worth of funds seeking ESG or impact investments were raised between 2012 and 2022, accounting for 11% of total private market fundraising in the UK. Aggregate fundraising seeking ESG or impact investments peaked in 2021, representing 19% of total UK private market fundraising for the year. Despite a decline in 2022, private asset managers told us that they expect investor demand for ESG and impact funds to continue to grow. Managers plan to expand their offerings to meet the demand from investors and keep pace with the market.

Contributions of UK private market funds seeking ESG or impact investments have grown over the past decade, with cumulative net cash inflow reaching £33 billion

Why?

The purpose of the ESG in Private Capital survey is to explore the opportunities and challenges faced by UK-headquartered private asset investors while integrating ESG in their investment process.

When?

The survey was conducted between January and March 2023.

Who?

We surveyed 69 individuals from 61 UK-headquartered private asset investors (both General Partners and Limited Partners) and compared ESG integration across different firm sizes, varying roles, and asset classes – Private Equity, Private Debt, and Real Assets (Real Estate and Infrastructure). We further interviewed five respondents to delve into their strategies and the challenges they face.

Disclaimer

This study is based on data gathered from a representative sample of market participants across GPs and LPs in the UK. Given that our respondents are either already involved in the market or have strong views on the topic of ESG in private capital, care should be taken when interpreting these findings which may not be a direct corollary for activity and sentiment across the whole UK private capital marketplace.

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Key Findings

UK private market firms are committed to integrating ESG factors into investment decisions, with 91% already having ESG policies in place.
Clients’ views – rather than regulators, or the moral imperative - are driving their approach to ESG.

Some investors regard ESG considerations as primarily a risk mitigator, while for others ESG is key to their value creation strategy. They focus both on acquiring the “right” assets, but also effectively managing them during ownership.
Two thirds of GPs in our sample believe they make the most impact on ESG outcomes during the ownership/ asset management stage.

GPs are more confident than their LP counterparts that ESG integration improves fund performance.
GPs view ESG as beneficial to generating robust long-term returns – but struggle to measure its value.

30% of private market investors surveyed use the IRIS+ impact investing framework
This is a disproportionately large interest relative to overall impact investing which is c. 1% of all UK invested assets.

UK private market firms are committed to integrating ESG factors into investment decisions, with 91% already having ESG policies in place.
Clients’ views – rather than regulators, or the moral imperative - are driving their approach to ESG.

Some investors regard ESG considerations as primarily a risk mitigator, while for others ESG is key to their value creation strategy. They focus both on acquiring the “right” assets, but also effectively managing them during ownership.
Two thirds of GPs in our sample believe they make the most impact on ESG outcomes during the ownership/ asset management stage.

GPs are more confident than their LP counterparts that ESG integration improves fund performance.
GPs view ESG as beneficial to generating robust long-term returns – but struggle to measure its value.

30% of private market investors surveyed use the IRIS+ impact investing framework
This is a disproportionately large interest relative to overall impact investing which is c. 1% of all UK invested assets.

In developing ESG policies, GPs and LPs are highly aligned across most key areas.
There is some divergence of views on how best to define outcomes and measure success, as well as on the approach to management of ESG risks.

Investors face challenges in addressing the disparate reporting frameworks and sourcing data to meet LPs individual requirements, with significant resources devoted to collecting data, reporting and compliance rather than advancing sustainability outcomes.
Around two thirds of respondents integrate ESG data in their investment process. Smaller firms identify the portfolio companies/assets monitoring phase as the most challenging, whereas larger firms cite the due diligence phase as the most difficult from a data perspective.

Private market investors prefer ESG roles to be filled by individuals with many years of ESG experience, rather than to upskill in-house teams on ESG. This may perpetuate the shortage of ESG expertise.
Securing the right talent with a balanced skillset is challenging due to high demand and low supply. This has driven up compensation packages, making it hard for many firms to afford and retain talent.

Benchmarking of ESG performance against peers still lacks widespread adoption, with 34% of respondents not using any of the current ESG benchmark providers. For Private Debt benchmarking is even less common, with 56% of respondents not using ESG benchmarks.

In developing ESG policies, GPs and LPs are highly aligned across most key areas.
There is some divergence of views on how best to define outcomes and measure success, as well as on the approach to management of ESG risks.

Investors face challenges in addressing the disparate reporting frameworks and sourcing data to meet LPs individual requirements, with significant resources devoted to collecting data, reporting and compliance rather than advancing sustainability outcomes.
Around two thirds of respondents integrate ESG data in their investment process. Smaller firms identify the portfolio companies/assets monitoring phase as the most challenging, whereas larger firms cite the due diligence phase as the most difficult from a data perspective.

Private market investors prefer ESG roles to be filled by individuals with many years of ESG experience, rather than to upskill in-house teams on ESG. This may perpetuate the shortage of ESG expertise.
Securing the right talent with a balanced skillset is challenging due to high demand and low supply. This has driven up compensation packages, making it hard for many firms to afford and retain talent.

Benchmarking of ESG performance against peers still lacks widespread adoption, with 34% of respondents not using any of the current ESG benchmark providers. For Private Debt benchmarking is even less common, with 56% of respondents not using ESG benchmarks.