Institutional investors worldwide are accelerating their shift towards sustainable private markets, according to three studies conducted by L&G, Schroders, and Montana Capital Partners. They are increasing allocations to ESG-focused sectors such as renewable energy, healthcare, and infrastructure.
L&G and Montana Capital Partners both surveyed more than 100 institutional investors - only British in the case of L&G and institutions from mostly Europe and Switzerland in the case of Montana Capital Partners. Schroders surveyed more than 2,800 professional investors from 33 countries.
Legal & General’s (L&G) research shows that UK institutional investors plan to significantly expand the sustainable and impact-driven components of their private market portfolios. By 2026, these mandates are expected to account for 45 percent of their private market investments, up from the current 37 percent.
The L&G study, based on responses from 150 institutional investors managing a combined £7.6 trillion in assets, highlights a growing alignment between financial returns and environmental and social objectives. A significant majority of respondents identified environmental (77 percent) and social (75 percent) factors as key priorities in investment decisions.
DC pension funds leading the way
Defined Contribution (DC) pension schemes are driving this shift, with sustainable mandates projected to make up 50 percent of their portfolios, according to L&G. Insurers and Defined Benefit (DB) schemes follow closely, with expected allocations of 47 percent and 45 percent, respectively.
Top environmental priorities include clean energy and renewable infrastructure, cited by 81 percent of investors in the L&G survey, along with sustainable mobility and real estate. Social priorities are led by economic infrastructure, healthcare, and affordable housing, with life sciences and healthcare gaining traction among DC schemes.
Insurers, pension funds, wealth managers and financial advisors surveyed by Schroders are also expanding their allocation to - equities and - private markets, according to the Schroders Global Investor Insights Survey 2024. It again shows that they believe the opportunities are mainly to be found in the sustainable area. More than half of respondents find private assets attractive because of competitive returns and diversification benefits. Infrastructure and renewable energy were cited as top sectors.
Europe at the forefront
The trend is further supported by the Montana Capital Partners 2024 Investor Survey, which found that 62 percent of surveyed institutional investors consider ESG factors essential or important in private equity investment decisions. European investors lead the way, with 79 percent prioritising ESG considerations. The survey underscores the appeal of mid-market private equity for sustainable investors, showing a clear preference for founder-led companies with significant value creation potential and less competition compared to large-cap funds.
Montana Capital Partners notes that the private markets sector is adapting to the growing demand for environmentally and socially responsible investments. Many investors are now strategically targeting infrastructure, renewable energy, and healthcare in line with broader sustainability goals. The research also highlights the importance of customisation and points to a knowledge gap regarding the timelines and complexities of these investments.
Additionally, Montana Capital Partners identifies rising interest among institutional investors in secondary markets, owing to their ability to complement traditional private equity strategies.