ESG in Private Markets:
From the Perspective of Asset Owners and Managers

We take a look at how ESG factors will interact with private markets investors in the next few years.

December 2021

There is plenty of common ground for asset owners and managers in their views on how environmental, social and governance (ESG) interacts with private markets investing. However, they have their differences too.

While both agree on a positive demand and the requirement for common data standards, asset owners are more likely to view ESG as a factor of risk. Through our State Street Private Markets Study[1] , we explored these commonalities and differences further.

Ushering in an era of sustainable investing

ESG factors have become a crucial element in many asset owners’ investment strategies over the past few years. Since the onset of the COVID-19 pandemic, there has been a boom in demand for sustainable assets.

Three-quarters of survey respondents said that greater availability of sustainable or ESG-friendly private market investment opportunities would boost the asset class.

Three in five asset owners (61 percent) want more private assets that make a “positive, measurable contribution to sustainability or other ESG criteria”.


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ESG data standardization

While data standards in public equities – and to a lesser extent fixed income – have improved drastically in a relatively short space of time, private markets’ ESG data varies widely and is often unavailable.

Asset owners and managers alike agree that this lack of ESG data standards makes it difficult to compare potential investments and to assess their sustainability credentials.

Weak accounting standards and audit practices are a significant problem for asset managers, respondents indicated, with many private companies not publishing accounts in accordance with internationally accepted standards. Even fewer publish regular data or information about ESG criteria – although recent collaborative initiatives such as the Novata platform[2] and the ESG Data Convergence Project[3] indicate a willingness to improve this situation.

In addition, many asset owners place a high degree of importance on ESG analysis to inform investment decision making, manage risks appropriately and enhance portfolio returns.


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Emerging ESG themes across regions

There was a significant regional variation regarding views on ESG themes. Our survey found that only 13 percent of asset owners in North America cited ESG investing opportunities as a top driver of future growth in private markets investing, compared with 42 percent for Europe-based investors. For asset managers, the figures were and 21 percent and 25 percent respectively.  

To some extent, this may reflect the higher profile that ESG-themed investing has in Europe. Asset owners in the Netherlands, Sweden, Denmark and the United Kingdom in particular have led many global initiatives on climate change reporting and sustainability issues.

This regional variance is driven by a number of factors: asset owner leadership, regulation at a national and regional level developing faster in Europe, the European Union passing several significant pieces of legislation aimed at boosting and bolstering sustainable investment and disclosures, and most notably, the Sustainable Finance Disclosure Regulation.

Our survey found that Europe-based asset owners and managers are much more likely to pass on investment opportunities if they would have an adverse impact on ESG criteria.

Asset managers in North America are less likely to incorporate ESG data and information into their investment decision making and risk management processes, and thus, are less likely to link ESG criteria to improved investment returns.

However, this could be set to change in the coming years as financial regulators in the United States have begun taking concerted actions to improve the reporting of ESG criteria and data in public markets.

 

[1] State Street Private Markets Study, September 2021, powered by CoreData Research.
[2] ‘Non-Profit & For-Profit Leaders Form Novata, a New Technology Platform Designed to Streamline ESG Reporting Across the Private Markets’, press release, 7 October 2021.
https://www.businesswire.com/news/home/20211007005600/en/Non-Profit-For-Profit-Leaders-Form-Novata-a-New-Technology-Platform-Designed-to-Streamline-ESG-Reporting-Across-the-Private-Markets
[3] ‘Private Equity Industry Establishes First-Ever LP and GP Partnership to Standardize ESG Reporting’, Carlyle Group press release, 30 September 2021.
https://www.carlyle.com/media-room/news-release-archive/private-equity-industry-establishes-first-ever-lp-and-gp-partnership-standardize-esg-reporting