Private equity firms and hedge funds are under increasing pressure to establish ESG policies and include sustainability aspects in their investment portfolios, according to a recent report by the global professional services firm EY.
For the new "2022 EY Global Alternative Fund Survey," developed in collaboration with Coalition Greenwich, interviews were conducted with 114 hedge funds representing more than US$1.7trillion in AUM, 112 private equity firms representing more than US 2.8trillion$ in AUM, and 61 institutional investors representing approximately US$1.3trillion in AUM. The study inquired about industry trends, long-term positioning, people management, investment products, the regulatory environment, and strategic priorities.
The survey discovered that alternative asset managers are under growing scrutiny on ESG issues, with 26% of investors indicating that they decided not to invest with a manager this year due to poor ESG policies, up from 20% last year.
Only 11% of investors said that managers' corporate ESG policies have no bearing on their decisions to invest or remain invested, while 36% reported that these aspects are "essential" or "critically important" to their investment decisions.
Managers may be under pressure to strengthen their ESG policies, but they may also have opportunity to provide clients with ESG-focused solutions. While today only 14% of investors are forced to engage in socially responsible items, 29% expect to be required to invest in these products within the next two to three years. Over a third of the investors stated that they now invest in ESG-focused funds or want to do so in the future.
Governance and climate risk were the top ESG criteria evaluated by investors when making investment decisions, with 63% and 61% of investors, respectively, reporting an interest, followed by human rights practises and DEI, each with 41%.
While alternative asset managers appear to be responding to investors' ESG demands, there is still considerable room for improvement, as the report found that only 53% of managers are currently incorporating ESG risks and considerations into their investment decision-making, and 18% have not yet established a formal ESG policy.
In its report, EY stated:
"Meeting investor ESG policy and reporting criteria is gaining importance, as 26% of investors decided in 2022 not to invest with a management due to poor ESG policies, a five-point increase from 2021. This rise should act as a reminder to managers to take seriously the investors' demands for suitable ESG policies and reporting. Managers who disregard this development risk losing investor interest and capital allocations."