Interestingly we see a transformative shift of institutional investors towards ESG investing in private markets, highlighting its rise, the demand for enhanced reporting, and the potential for a sustainable future.

According to a report published by PwC Luxembourg, titled ‘GPs’ Global ESG Strategies: Disclosure Standards, Data Requirements & Strategic Options‘, institutional investors are transforming their investment philosophy as they increasingly prioritise environmental, social and governance (ESG) considerations.

As the momentum behind ESG grows, most institutional investors plan to cease non-ESG private market investments by 2025.

Growing commitment to ESG

Institutional investors have shown a solid commitment to ESG. Most surveyed, expressed their intention to increase their private market ESG investments over the next two years. More than a third of these investors are targeting more than 20% increases. This growing trend indicates that institutional investors recognise the potential for ESG-focused investments to deliver sustainable returns while aligning with their values and expectations.

Long-term value is becoming more self-evident. While opportunities and challenges vary significantly from region to region and asset class to asset class, the key message remains: rethink the status quo and view your operations and license to exist through an ESG lens.

Sustainability experts emphasise the widespread adoption of ESG approaches and policies among industry managers and underscore the longstanding importance of good governance and commercial sustainability in private market investment. Furthermore, the significance of quantifying and reporting these aspects to investors clearly and meaningfully is stressed. Quantifying and reporting ESG aspects to investors transparently and effectively are the fundamental change we see developing, driven by investor interests and recognising the importance of ESG risks and opportunities. According to experts, the transformative trend towards ESG is driven by the increasing recognition of ESG risks and opportunities and the growing interests of investors.

ESG challenges and reporting discrepancies

It is being seen that private equity (PE) has needed to be faster in adopting ESG practices due to perceived incompatibility. This observation is made in comparison to other private market asset classes. Desired improvements include qualitative data on Taxonomy alignment and more frequent data on sustainable development goals (SDG) alignment and climate impact. The report recommends maintaining an open dialogue with investors to adapt reporting practices and exceed regulatory compliance. While overall satisfaction with ESG reporting is high, it is essential to be mindful of potential reputational damage and loss of business if they fail to address shortcomings. Institutional investors can enhance their portfolios and contribute to a more sustainable and resilient private market ecosystem by capitalising on this growth potential.

Building trust through EU regulation

The sentiment towards EU regulation regarding ESG is overwhelmingly positive among institutional investors. This attitude demonstrates the positive impact of ESG regulation in providing a clear framework and standardisation, which contributes to building trust and confidence among institutional investors.

According to the report, some may consider the regulations as an additional compliance burden rather than guidance to prevent greenwashing, as they believe they already have strong internal policies.

A strategic imperative

The current rise of ESG indicates a significant shift in the institutional investment space. Nowadays, financial returns and societal impact are viewed as interconnected concepts. A recent report has backed up this viewpoint by highlighting the potential for institutional investors to drive positive change and help shape a more sustainable future. This change can be achieved by institutional investors proactively adopting ESG principles, improving reporting standards, and seizing growth opportunities in private markets. The quality, reliability, and transparency of ESG data reporting are critical factors in investment management. They allow for informed decisions that can genuinely impact the world. In Europe, investors are increasingly placing importance on ESG considerations, which enable investments to align with values and expectations while delivering sustainable returns. This growing commitment to ESG reflects an appreciation of its potential to unlock long-term value and contribute to a resilient investment ecosystem. Despite this, challenges remain, such as the need for standardised methodologies and transparent reporting to prevent greenwashing. Open dialogue, adaptation, and continual improvement in ESG practices are also essential.

As institutional investors contemplate the transformative power of ESG, they may be inspired to consider their role in shaping a responsible investment landscape. By embracing ESG principles, the outlook is bright: investors can help create a more sustainable future while still achieving financial success.

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