“ESG is proving to be more durable than many had anticipated, following the renewed focus on return generation in a higher for longer scenario,” noted Alex Murray, head of real assets research insights at Preqin, in a press statement on Wednesday. Photo: Preqin

“ESG is proving to be more durable than many had anticipated, following the renewed focus on return generation in a higher for longer scenario,” noted Alex Murray, head of real assets research insights at Preqin, in a press statement on Wednesday. Photo: Preqin

Despite a challenging 2023, ESG fundraising rebounded to $55bn by April 2024, with Preqin finding no significant performance difference between ESG and non-ESG funds.

Environmental, social and governance (ESG) funds rebounded strongly in the first four months of 2024, raising $55bn, according to alternative investment data provider Preqin. A report published by the firm on Wednesday 3 July 2024 delved into fundraising, performance and ESG policies, highlighting varying integration across asset classes and regions.

Fundraising trends

In 2023, ESG fundraising saw a decline from its peak of $163bn in 2022. Preqin attributed this surge in 2022 to ESG funds’ ability to attract investors despite challenging economic conditions. However, factors such as interest rate hikes and portfolio pressures in 2023 led to a significant decrease in ESG fundraising to $90bn. Nonetheless, by April 2024, ESG funds had rebounded to $55bn, maintaining a pace akin to the standout year of 2022, with European managers overseeing 68% of the total.

Performance comparison

Preqin also addressed the ongoing debate surrounding ESG’s impact on fund performance. Analysing 10,812 non-ESG funds and 215 ESG funds, the study found no statistically significant performance difference between the two categories. ESG funds exhibited an average internal rate of return (IRR) of 13.5%, slightly lower than the 15% IRR reported by non-ESG private capital funds.

This finding aligns with the views of most investors, with 66% reporting in June 2024 that they believed there was no performance link. However, analysis of ESG sub-strategies indicated that impact funds yielded significantly lower returns. Notably, younger ESG funds reported even lower average IRRs.

Investor sentiment

Geographically, Europe led in energy funds focused specifically on renewables, whereas the US maintained dominance in broader energy capital investments. The report highlighted the potential of electric vehicles in significantly reducing carbon emissions within the transport sector. Additionally, investor sentiment underscored ESG’s critical importance, with 60% expressing that they had rejected deals due to ESG concerns or were inclined to do so, highlighting ESG’s strategic relevance for stakeholders and its impact on competitive dynamics.

Infrastructure’s growing role

Infrastructure emerged as a pivotal sector in ESG fundraising, comprising 44% of total funds and posing a significant challenge to private equity. Private debt also saw substantial ESG capital influx, marking its busiest year in 2023. Within infrastructure, renewables accounted for a record 59% of deals in 2023, with infrastructure funds raising 72% of $1.23trn in renewable energy capital since 2014.

Alex Murray, vice president and head of real assets, research insights, at Preqin, commented in a press announcement, “The strong growth in ESG fundraising across private markets suggests more managers want new funds to be aligned with ESG fund requirements. The reasons vary from being more able to raise capital to aiding risk management and deal selection strategies. Regardless, the still relatively nascent sector within alternatives will continue to grow, owing to Europe’s more developed regulatory environment.”

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