ESG or nothing – The sustainable finance transformation in private markets

New data from PwC Luxembourg suggests the majority of Limited Partners (LPs) and General Partners (GPs) are shifting towards an "ESG or nothing" investment philosophy, with over three quarters planning to cease investing in or promoting non-ESG private market (PM) products by the end of 2025.

The data comes from a new report (available here) entitled: GPs’ Global ESG Strategies: Disclosure Standards, Data Requirements & Strategic Options, which represents the fourth instalment of PwC’s European Sustainable Finance Series showcasing the impact of regulation driving ESG uptake across the European Union, the United Kingdom, the United States and the Asia-Pacific Region. The findings are based on a wide range of primary data gathered through a survey of 300 GPs and 300 LPs across all four jurisdictions.

ESG represents an unyielding focal point of the global PM landscape, and the importance varies by regions around the globe, but according to the data, both LPs and GPs are recognising the importance of redirecting private capital towards sustainable objectives as a crucial aspect of generating value and bringing about a green transformation of the economy.

The key findings from the report include:

• Increased commitment to ESG – 87.5% of LPs we surveyed are planning on increasing their PM ESG investments over the coming two years – with over a third targeting increases of more than 20%. Asset Managers are responding, with 86.5% of those surveyed planning to expand their ESG PM offering over the coming 24 months in order to grasp this demand – of which almost half are planning to expand their ESG product shelves by over 20%.

• Opportunity for growth – Private Equity LPs and GPs currently have the lowest average asset allocation towards ESG products across the PM realm, as only 57.4% and 47.6% of Private Equity LPs and GPs allocate over 30% of their assets to Article 8 products. These figures fall well below the average 63.7% and 62.1% figures recorded among their Real Estate, Infrastructure and Private Debt counterparts.

• Added value in ESG reporting – 66.6% of LPs surveyed stated that they are willing to accept higher management fees in exchange for notable improvements in their GPs’ ESG data reporting. Nearly 45% of LPs stated that they would be willing to pay between 5% and 9% more in management fees should this price increase be translated into quality improvements in their GPs’ ESG data reporting practices. An additional 23% of LPs stated their willingness to absorb increases in excess of 10%.

• Sentiment towards EU Regulation – 60.5% of EU LPs surveyed described themselves as (very) satisfied with developments in EU regulation, closely followed by GPs with 57.1% on average being (very) satisfied with the impacts generated by ESG regulation. Interestingly, 63.8% of EU LPs are satisfied with the impact of regulation in terms of addressing greenwashing concerns, while only 49.2% of EU GPs share this view.

• UK remains optimistic – The survey results unveil a relatively widespread sense of optimism among the UK’s GPs and LPs regarding the anticipated impacts of the Green Taxonomy and SDR, with 59.1% of LPs and 58.0% of GPs surveyed believing these will have a positive impact.

• US investment community welcomes SEC regulation – In the US, a respective 71.0% and 69.2% of LPs and GPs expect the SEC proposed ESG-related rules to have an (extremely) positive impact – the strongest level of overall optimism recorded across all regions. PwC analysis also suggests 97.0% and 94.0% of US LPs and GPs are planning to increase their AuM in PM ESG products over the coming 24 months – the largest degree of willingness recorded across all regions.

• APAC lags behind – APAC LPs currently hold the least optimistic view of ESG regulation across our entire survey sample – with only 51.7% expecting these regulations to have a positive impact. Although this figure is by no means insignificant, it represents by far the lowest degree of LP confidence across our entire survey sample – falling well below the 64.9% average recorded across the EU, UK and US.

• The need for international alignment – The survey results suggest the global Asset Management community are strong supporters of the ISSB goals – with over two-thirds (68.1%) of the GPs surveyed expecting the standard to successfully harmonise global ESG disclosure standards. Interestingly, LPs appear to be marginally more optimistic than their GP peers, with 72.0% expecting the framework to succeed in its aims.

By analysing LP and GP expectations and views as it pertains to ESG regulation across the US, UK, EU and APAC, taking into consideration the asset class specificities, this new report provides a global overview of the ESG wave that is sweeping across the Private Markets which is redefining the financial, regulatory and investor landscape.

Olivier Carré, Financial Services Market Leader at PwC Luxembourg, said:

“The global Private Markets landscape is on the verge of a substantial ESG-led transformation. LPs across the world have been increasingly focusing on ESG considerations across the different PM asset classes, while GPs who fail to adapt to changing Investor demands risk losing business from the fast-increasing number of ESG-oriented investors. In this rapidly changing backdrop, GPs are urged to rethink their modus operandi and embed sustainability data and capabilities at the heart of the corporate culture and investment process in order to keep abreast with regulatory developments, meet investor expectations and use the sustainable transition as a differentiating factor.

While opportunities and challenges vary greatly from region to region and asset class to asset class, the key message remains the same: rethink the status quo and view your operations and licence to exist through an ESG lens. In doing so, GPs not only stand to minimise financial and reputational risks, but are in fact positioning themselves to unlock the full long-term value creation potential inherent to ESG integration.”

Download the report here.