Corporate executives might be making a lot of noise about ESG (environmental, social and governance) — some of it positive, some not — but when it comes to investors, sustainability concerns appear to be here to stay.
Nearly 60% of investors surveyed for a new PitchBook report say that at least a quarter of their portfolio has a sustainable mandate, and about a third say that at least half of their portfolio fits the definition. What’s more, over half of participants said sustainability was a higher priority than outright investment performance, with around 10% saying it’s the only factor worth considering.
Not everyone is sold, though: The number of investors who dismiss sustainability appears to be a relatively slim minority, with fewer than 20% of participants saying that ESG has no place as an investment criteria.
The line between the yeas and nays appears to be thickening, and investors who held strong but not strident opinions in previous years appear to be moving toward one extreme or another.
But that still leaves plenty of room in the middle, and that’s where investors seem to be more welcoming of sustainability claims. When asked to describe themselves on a scale from one to nine, from performance-centric to sustainability-centric, the average has trended in favor of ESG.
Central American, South American and Caribbean investors are at the forefront, with half of the participants from those regions saying they have integrated sustainable investment principles throughout their portfolio. European investors come in second at 42%, and North America and Asia-Pacific tie with 36% each.
What’s driving the trend? A dedicated group of LPs, in part. A quarter of asset managers report that more than 75% of their LPs or clients are either interested in sustainability or require it when deciding where to allocate their funds. That’s a significant increase from 17% just three years ago.
Much of that push appears to be in the way they direct their investments, prioritizing sustainability in their allocations for venture capital and private equity. Almost three-quarters of LPs invested their capital into venture and PE funds that focused on sustainable investing. That may not be surprising given that PitchBook conducted the survey, but the magnitude is significant enough to indicate a trend, implying that despite political complaints concerning ESG investing, capital has made its own call.
Of those who did apply ESG principles when determining investment decisions, most focused on energy (62%) and climate (60%) to determine impact. Agriculture and diversity and inclusion were the next most prominent factors, at 44% and 39%, respectively. A majority of investors measured the social and environmental returns of their investments, but not by much; only 54% used some kind of framework to assess impact. Of all investors, LPs are the farthest behind, with just 31% measuring the ESG impact of their dollars.
Investors were candid about their struggles. Nearly 40% said they had difficulty determining clear definitions and rubrics for measuring the social and environmental impact of their investments. Still, obtaining that data once those frameworks are put in place doesn’t seem to be a big hurdle. Only 25% of participants said that was an issue.
The other big concern was the perception that ESG investments would have a negative impact on returns. In some ways that’s not surprising. The ESG field is relatively young, and while early results appear promising, skeptics probably won’t be convinced without a longer track record.
Still, given the persistent — and arguably growing — upstream interest in ESG, it’s likely that the coming decade will see a surge in companies that have sustainability as the core of their mission and business plan. And considering the impact those companies are likely to have on the marketplace, it’s unlikely that ESG is going anywhere.