The rapid growth of ESG investment has not left private markets behind. LPs and GPs, having taken stock of where the wind is blowing, have moved towards an ‘ESG or nothing’ investment philosophy, with the majority planning to cease investing in or promoting non-ESG private markets products by the end of 2025. This development is part of a paradigm shift in the global private markets landscape.
Limited Partners (LPs) and General Partners (GPs) have recognised the importance of redirecting private capital towards sustainable objectives as “a crucial aspect of generating value and bringing about a green transformation of the economy”, concluded a Luxembourg report released on Tuesday.
“It is evident that the global PM landscape is on the verge of a paradigm shift, rapidly evolving towards a reality in which LPs and GPs alike increasingly value non-financial impacts on the same level as financial return,” according to a PwC Luxembourg report entitled GPs Global ESG Strategies, Disclosure Standards, Data Requirements & Strategic Options, which is based on a survey of 300 general partners and 300 limited partners across the four jurisdictions considered.
Four regions
The report considers the situation in four significant areas of the world: The United States, Europe, the UK and Asia-Pacific, all of which have made progress in putting in place ESG regulations, but each taking a different approach. The report also highlighted that private market firms are encountering conflicts between regional- and national-level regulations.
“This specifically hinders the intra-regional distribution of ESG Funds, which represents a strong encumbrance of GPs straddling multiple regulatory regimes,” said the report.
LPs and GPs are aligned on the impact of burdensome compliance requirements. LPs and GPs reported they struggled with the various requirements and documentation, which complicated their investment processes. GPs, for example, report having a tough time gathering and reporting on an increasingly wide range of ESG data requirements, which along with the effort to monitor and assess ESG impacts, “will likely incur higher costs for the launch and management of ESG funds.”
Opaque nature
“This is rendered all the more challenging by the traditionally ‘opaque’ nature of PM and the subsequent absence of accessible information.”
Noting that Europe has taken the lead on ESG finance, and has established a somewhat dominant position worldwide, the report considers the impact of EU legislation like the Sustainable Finance Disclosure Regulation, or SFDR, the EU Taxonomy and the Corporate Sustainability Reporting Directive, or CSRD.
According to the survey, 60.5% of EU LPs are “very satisfied across the board.” This was the second highest level among the regions, according to the survey, with only UK LPs more positive.
Impact of ESG legislation
The SFDR will influence GPs investment approach when looking at PM funds. It will also affect LPs in terms of the data requested from such funds. Companies which have received investment from private markets funds will be required under the CSRD to disclose a substantial amount of sustainability-related data. This will also be handy for both LPs and GPs when considering investment opportunities.
In the UK, there is a “widespread sense of optimism among the country’s GPs and LPs regarding the anticipated effects of the Green Taxonomy and UK Sustainable Disclosure Requirements (SDR). The survey found that some 59.1% of LPs believe these regulations will positively impact the country’s ESG landscape, with the highest optimism reserved for the UK legislation’s ability to “address greenwashing concerns.”
There isn’t always alignment. For example, UK GPs are notably more confident than LPs about the regulations’ abilities to “enhance risk management. UK GPs see this as the area in which they expect the second most positive impact, but it’s also the area where the lowest share of the country’s LPs expect a positive impact.
Political opposition in US
The report looks at the less advanced situation in the US, which has had to contend with political opposition to ESG and a lack of consistent regulation on the federal level. These factors contribute to the US taking a “notably more cautious approach,” which includes an amendment to the 1933 Securities Act requiring traded companies to include climate-related disclosures in their documentation.
In the Asia-Pacific (APAC) region, ESG investing lags behind both Europe and North America. However, ESG assets under management (AuM) there have increased five-fold from USD 0.2tn in 2015 to over USD 1tn in 2021. The region has proposed an ASEAN Taxonomy for Sustainable Finance and the ASEAN Sustainable and Responsible Fund Standards, both of which are to be implemented in 2025.
Despite legislative progress, the survey notes “a relatively strong degree of apprehensiveness of APAC LPs towards the current and expected ESG PM regulations in their respective countries.” APAC LPs have the least optimistic view of ESG regulation across the survey’s sample, with only 51.75% expecting these regulations to have a positive impact.