Apex Group report reveals pension fund attitudes to ESG in private markets

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Pension funds embrace private markets in search for returns uncorrelated to economic cycle and also pursue environmental and social governance (“ESG”) aligned investments.

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24/10/2023 |
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Apex Group Ltd. (“Apex Group” or “The Group”), a global financial services provider, today publishes new research into the role of ESG in shaping pension fund allocations to Private Equity and Debt asset classes.

Apex Group in association with Professor Amin Rajan of CREATE Research surveyed 152 pension funds globally, with 54% from the public sector and 46% from the private sector. The report addresses the questions:

  • What is the current allocation to Private Equity and Private Debt by pension plans worldwide?
  • What factors are constraining allocations to these asset classes?
  • Are Private Equity and Private Debt attractive for ESG investing?
  • What factors are likely to drive allocations over the next three years?
  • How can asset managers evolve in order to attract higher allocations?

Recent years have seen Private Equity and Private Debt grow in popularity for pension fund allocators, with alignment to ESG principles gaining attention over the same period. However pension funds, attracted by greater resilience demonstrated by Private Equity and Private Debt during short-term economic cycles and volatility, are demanding ever more scrutiny of ESG strategies in these asset classes.

Around 35% of pension assets now have overt ESG goals, with 88% of pension funds surveyed viewing Private Equity as a suitable asset class for ESG investing to either some or a large extent, with this figure falling slightly to 82% for Private Debt.

This research found there is still significant capacity and appetite for this market to grow. Of pension funds invested in Private Equity, 24% have no ESG allocations, while 57% only have allocations of up to 5% and just 19% have allocations of over 5%. In Private Debt, 34% of pension fund respondents have no ESG allocations, 57% have allocations of up to 5% and 9% have allocations of over 5%. Nearly three quarters (73%) of pension funds surveyed said that they are looking to maintain or increase allocations to ESG-related funds in the next three years.

Despite the growing number of private markets funds adopting ESG principles, a number of factors have acted as a drag on institutional allocations to ESG aligned Private Equity and Debt funds. These include concerns about greenwashing which were reported by 47% of respondents to have dampened investor appetite, while 51% highlighted the political backlash against ESG in the US as a risk factor.

Emma Bickerstaffe, Managing Director, ESG & Sustainability at Apex Group comments: “Private markets continue to attract institutional investment, offering strong growth prospects as well as the ability to weather shorter-term market volatility, and an ever-growing alignment with ESG principles.

“However, with growing scrutiny from regulators, pension plan members and other stakeholders, allocators will be more discerning when it comes to selecting funds in which to invest. ESG values need to be embedded in the corporate DNA of asset managers, through for example, the linking of private markets executive compensation with ESG outcomes and by ensuring that sustainability reports provide verified information and narrative disclosures which offer concrete examples of the challenges, actions and outcomes behind the numbers.

“Our data show that despite the noise of recent months, ESG is here to stay as a key consideration for allocators, and the dynamism and growth focus of the private markets mean that they are well placed to help their portfolios become ESG aligned. ”

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