The landscape of environmental, social and governance, and impact investing in private markets is undergoing significant transformations, driven by macroeconomic conditions, regulatory changes and evolving investor preferences, reported data and research firm Pitchbook in a recent publication. on Thursday 21 March 2024, the report highlighted asset managers’ efforts to pivot and adapt their strategies in response to the evolving regulatory environment and market dynamics.
ESG commitments amid macroeconomic challenges
Asset managers have exhibited a spectrum of reactions to ESG commitments against the backdrop of a challenging macroeconomic environment, found the report. On one hand, some managers have scaled back their public ESG commitments, influenced by a combination of heightened interest rates and looming recession fears. This marks a notable shift from the enthusiastic ESG adoption seen at the pandemic’s outset.
On the other hand, another group of asset managers is leveraging ESG as an essential tool for value creation and protection in these uncertain times, spotlighting environmental opportunities to capitalise on government policies and initiatives for economic advantage.
Financial performance and investing strategies
While many managers voice concerns about the financial viability of ESG and impact investing strategies, Pitchbook’s analysis suggests that engaging in ESG does not necessitate sacrificing returns. A comparison of fund return data between principles for responsible investment signatories and their non-signatory counterparts shows no significant performance disparity, challenging the prevalent doubts about ESG’s financial impact.
Similarly, impact investing--aimed at generating positive social and environmental impacts alongside financial returns--reveals a broad and varied return potential, with top decile performers frequently surpassing those not prioritising impact, stated Pitchbook.
Regulatory landscape
Navigating the regulatory landscape for ESG and impact investing introduces its own challenges, particularly in the United States, where ESG-related disclosure requirements have experienced delays and dilution. In contrast, the European Union’s sustainable finance disclosure regulation stands out as a significant regulatory effort, establishing a framework for comprehensive ESG activity regulation that could enhance public disclosures and enable access to high-quality data on private funds. This regulation has ignited hope and set the stage for a more standardised approach to ESG reporting globally, Pitchbook noted.
Impact fundraising
2023 witnessed a noticeable shift in fundraising trends, with a significant reduction in impact fundraising activity, yet emerging impact managers achieved a higher success rate than the broader fund population. This shift underscores the debate over the strategic focus of impact investing, as stakeholders weighed the merits of pursuing targeted impact goals against adopting a more generalised approach for achieving positive outcomes, highlighted Pitchbook.
Climate solutions
Pitchbook also observed an increasing allocation of impact fund commitments to climate solutions, reflecting a strong resolve from both governmental and private sectors to combat climate change. This movement signals a significant pivot towards investments that yield both financial returns and positive environmental impacts, remarked Pitchbook in the report.
Looking forward, Pitchbook anticipates that the dialogue around ESG and impact investing will continue to evolve, with growing attention on the materiality of environmental issues across different industries and geographies, and the importance of governance amidst high-profile incidents and the rapid advancement of AI technologies.