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EU Private Markets: ESG Reboot

Creating alpha and meeting investors’ needs: a matter of survival

As the world around us evolves, it is becoming increasingly apparent that environmental and social challenges – and the actions we must take in order to address them – will define this century. 

This evolving landscape has changed the course of the global political agenda, with significant knock-on effects on global financial markets. In this new backdrop, ESG and sustainable finance will become a matter of survival to meet the needs of sustainability-conscious investors, increased regulatory requirements and societal expectations. In this context, ESG investing is evolving into a veritable paradigm shift – particularly within the EU.

PM ESG assets domiciled

However, the bulk of the discussion surrounding the sheer transformational impact of ESG on the modern Asset and Wealth Management landscape has historically pertained to the traditional realm. That being said, one cannot overlook the rate and scale with which the ESG shift is redefining Europe’s Private Markets landscape. Recent years have seen a historic asset and sentiment shift within European PM (Private Markets), with LPs, society and regulators alike doubling down on their ESG demands - which has seen the volume of PM ESG assets domiciled in the region more than doubling since 2015 to reach EUR 252.9bn as of end-2020.

While this evolution is nothing short of formidable, we believe that the European Private Markets landscape may still be in the nascent stages of its ESG metamorphosis. According to our forecasts, European PM ESG assets will skyrocket to between EUR 775.7bn and EUR 1.2tn by 2025 – accounting for between 27.2% and 42.4% of the entire PM industry’s asset base. Real Assets, in particular, are poised to stand at the forefront of this surge; with ESG assets expected to account for 33.7% and 40.6% of Real Estate and Infrastructure’s total respective AuM by 2025. 

2022: the opportunity of the century

About our European Sustainable Finance Series and this report

In the first report in this series, “2022: the growth opportunity of the century”, we gave a perspective into the era-defining opportunity that ESG represents for European mutual fund managers and the key actions they should consider taking in order to seize it with both hands. The report also delves into how Europe’s binding regulatory developments, increased investor appetite and shifting societal values will see ESG skyrocket to the front and centre of the region’s investment landscape.

This paper marks the second in our European Sustainable Finance Series. The aim of this report is to take a deep dive into the major trends that are already transforming the ESG wave sweeping across the European Private Markets, and which is set to continue in the years ahead. Within this report we only discuss ESG related to PM asset classes (i.e. Private Equity, Private Debt, Infrastructure and Real Estate) funds. 

We use our findings to make informed recommendations as to the key actions that General Partners should consider in order to navigate the changing ESG landscape and unlock the opportunities it presents. We have further enhanced our report based on a wide range of primary data gathered through a Europe-focused survey of 200 General Partners (GPs) and 200 Limited Partners (LPs). We also carried out in-depth interviews with a number of GPs and LPs in order to get first-hand accounts of where the players think the industry is going.

Four key catalysts driving the sustained growth of ESG

Our forecasts are based on the acceleration of four key overarching catalysts that are driving change in Europe’s Private Markets, as well as the rise of asset-class specific dynamics. Together, these drivers and dynamics are propagating transformation and placing sustainability/ESG concerns at the heart of the industry.

Shifting societal values

A series of social and environmental upheavals in recent decades have brought in an era-defining shift in global societal values, resulting in the increased recognition that the future prosperity of the earth and its population hangs largely on tackling and mitigating sustainability risks.

Changing investor behaviour

Societal values and regulatory efforts have been propagating a veritable shift in investor behaviour. An increasing proportion of today’s investor base is prioritising the non-financial impacts of their investments along with their financial returns, moving past the sole prioritisation of performance when assessing investment decisions and selecting GPs. 

Indeed, 100% of the LPs we surveyed that do not currently invest in ESG intend to do so in the coming two years - while 99% of those that do invest in ESG base their manager selection decision on ESG grounds. The EU regulatory environment will act as a catalyst for this trend, putting additional pressure on GPs to incorporate ESG considerations into their fund offerings and overall strategies.

Policy shifts and regulatory changes

EU policymakers are increasingly looking outside of the public scope to support financing for the transition towards a more sustainable and equitable future; launching a number of policies aimed at mobilising private financing for the public good. The EU has also successfully institutionalised and codified ESG and sustainability considerations through the implementation of a comprehensive regulatory framework which has set the basis for a ‘double materiality’ - marrying returns and ESG within the fiduciary duties of its investment management industry. This rapidly expanding regulatory agenda – with the SFDR , the EU Taxonomy  and the CSDR  at the forefront – is set to drive ESG’s alpha generation potential to new heights.

The EU stands well at the forefront of the regulatory shift towards a sustainable standard of investing, with efforts of a comparable rate and scale having yet to materialise outside of the region - posing considerable issues for international GPs. That being said, the sheer magnitude of these regulatory changes – both in terms of structural impact and time horizon - will trigger a business strategy decision question to GPs globally in regards to when and to what extent they should adopt the new ESG/sustainability standards in their portfolio allocation and investment selection procedures. 

ESG’s value creation and risk mitigation

The perceived value of ESG within the AWM industry has traditionally been limited to its role as a compliance exercise or niche strategy for the ESG-oriented industry ‘outliers’. It was not until recently that the industry has awoken to the substantial contribution an invested asset can make towards a sustainability goal, as well the materiality of such assets in mitigating downside risk and enhancing value. 

Primarily driven by mounting regulation and stakeholder expectations, this surge in relevance stands to impact PM players at both the portfolio level (assets and financing) and entity level (corporate value and branding)

Six key actions to stay ahead of the curve

We have developed six key recommendations that GPs should consider undertaking to create alpha through ESG and drive the effective, sustainable transition of their respective business models:

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Contact us

Will Jackson-Moore

Global Private Equity, Real Assets and Sovereign Funds Leader, PwC United Kingdom

Tel: +44 (0)7710 157 908

Dr. Peter Gassmann

Managing Director, Strategy& Europe, and Global ESG Leader, PwC, Partner, PwC Germany

Joe Wiggins

Asset & Wealth Management Alternatives Leader, PwC United States

Olivier Carré

Markets and Strategy Financial Services Leader, PwC Luxembourg

Tel: +352 49 48 48 4174

Olwyn Alexander

Global Asset and Wealth Management Leader, PwC Ireland (Republic of)

Steve Roberts

PE Leader Germany & EMEA, PwC Germany

Tel: +49 69 9585-1950

Dariush Yazdani

Market Research Centre Partner, PwC Luxembourg

Tel: +352 49 48 48 2191