PwC Luxembourg study

ESG boosts European private market growth

ESG continues to reinvent the European private market landscape at a pace and scale not seen since the ratification of the AIFMD in 2011, according to experts at PwC Luxembourg. Photo: Shutterstock

ESG continues to reinvent the European private market landscape at a pace and scale not seen since the ratification of the AIFMD in 2011, according to experts at PwC Luxembourg. Photo: Shutterstock

ESG private markets are expected to be worth €1,200bn by 2025 and account for between 27.2% and 42.4% of total European private market assets, according to projections from the "EU Private Market: ESG Reboot" study by PwC Luxembourg.

The experts at the Big Four company are predicting a rapid increase in the number of private markets. This growth is driven by new green regulations and the boom in demand for sustainable investment. In 2020, ESG (environmental, social and governance) assets represented 14.8% of all private market assets in Europe, or €253bn. By 2025, they are expected to account for up to two-fifths of industry assets.

This ‘boom' will result in Europe alone accounting for 31% to 35.9% of global ESG private market assets, positioning the region at the top of the global ESG landscape. "The sheer scale of Europe's dominance in this area will see the region's influence transcend physical borders and spread across the globe," the report says.

The change in investor behaviour--whether guided by regulatory compliance or morally motivated commitment--is driving this progress. 100% of investors surveyed for the study who do not invest in ESG private market funds plan to do so in the next 24 months. 63% of investors already involved plan to increase their allocation to ESG funds in the same timeframe, with more than half targeting increases of 10% to 20%.

“Real” assets at the forefront

In detail, the implementation of the ESG investment philosophy still differs across the four private market asset classes, namely private equity, real estate, infrastructure and private debt.

“Real” assets are at the forefront of this surge: ESG assets are expected to account for 33.7% of investments in real estate (€153.2bn) and 40.6% of investments in infrastructure (€251.6bn). These proportions are 21.3% in private debt and 20.7% in private equity, at €78.8bn and €292bn respectively.

Growth is expected to be driven mainly by the creation of new funds rather than older products being redesigned for sustainable investment. In its best-case scenario, where private market ESG fund assets reach €1.2bn, PwC Luxembourg expects three-quarters of this to come from the launch of new funds.

Olivier Carré, financial services market leader & sustainability sponsor at PwC Luxembourg, is "optimistic" about the growth prospects. "We believe that ESG will lead to a structural upturn in the industry. We strongly believe that general partners with strong ESG skills and focus will not only achieve better investment performance, but also greater recognition from shareholders and stakeholders."

Updated on 13 October at 1.50pm to correct $7.8bn to €78.8bn and change currency to euros throughout. A previous version of this article spoke of private equity assets. This has been changed to private market assets.

This story was first published in French on Paperjam. It has been translated and edited for Delano.