ESG and private markets

Investment management clients want more focus on ESG (environmental, social and governance) in their private markets: 98% of DC schemes and 96% of wealth managers say private markets enable more of an ESG impact than investing in public markets. Asset managers concur … though the nature of this concurrence depends on whether the manager is in the US or the UK.

In our Pinpoint of view series, Carne experts take a deeper dive into the themes that matter to clients. 

Unanimity of purpose

US-based fund managers recognise the importance of ESG issues to clients.

Almost all (96%) we spoke with agree that private markets give the investor that little bit more control – allowing a greater ESG impact than in, say, investments in public markets.

They also believe private markets can play a hugely positive role in the transition to a lower carbon economy, with 20% strongly agreeing.

At the same time, around 90% of US managers expect ESG-related scrutiny to grow. This could mean managers exerting more effort to demonstrate genuine commitment to each of the E, S and G in their private markets activity.

No wonder 82% of the managers expect the industry trend of lost mandates thanks to poor ESG credentials and/or poor ESG transparency to increase. At the same time, 92% of managers say data quality and transparency must improve.

For UK fund managers, it’s a similar story.

For example, managers say private market investment is an essential funding solution to the green transition: 26% strongly agree and 74% slightly agree that private markets can play a hugely positive role in the transition to a lower carbon-intensive economy.

And UK managers also expect more scrutiny. Some 48% of respondents expect a dramatic increase in focus on environmental issues. The equivalent figures for social and governance issues are 50% and 40%.

This increasing scrutiny will pressure managers to retain business – like their US bedfellow, an overwhelming majority say poor ESG credentials will see firms losing business to rivals.

To avoid such business losses, managers will need to be better able to quantify ESG risk exposures in the private markets investments they make. One-fifth of UK managers says their ability to do this is excellent, 78% describe it as good and 2% describe it as average.

Our research demonstrates the materiality of ESG in private markets. When we spoke with DC schemes – a crucial new client segment for private markets – they were clear: the most important reason to invest in private markets is to improve the sustainability record of the DC plan.

If you would like to learn more, or discuss your plans for building and managing private markets funds, please contact Galaxy Mayani.

*About the research

Carne Group commissioned the market research company Pureprofile to interview 201 investors working for pension funds, family offices, wealth managers, insurance asset managers and consultants to institutional investors and asset managers in the UK, Germany, Switzerland, Italy, France, the Netherlands, Norway, Finland and Denmark with a total of $1.7 trillion assets under management.

The survey was conducted in December 2023 and January 2024.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.