Asset owners investing in alternatives are demanding higher environmental, social and governance (ESG) adherence when they seek investments due to a lack of data and standardised methodologoes, according to experts.
With the private sector assets lacking the transparency and standardisation of public investments, the need for ESG standards is even more pressing among alternative investments, analysts told AsianInvestor.
Alternative investments data provider Preqin’s most recent 2022 H1 Investor Outlook found a quarter (25%) of those surveyed reported having turned down an investment opportunity because of ESG standards, with a further two in five (39%) saying they would be prepared to do so.
Aligning investment decisions with environmental, social and governance (ESG) standards is a good start, according to Jaimee To, sustainable investment consultant at advisory and asset management firm Mercer.
And it is a good sign that investors are increasingly looking at ESG using a total portfolio approach, as opposed to focusing on a few asset classes only.
“With the lack of data and a standardised methodology to analyse ESG performance, investors typically take a longer time to assess opportunities in alternatives for ESG integration, compared to public assets where ESG data is more readily available,” To told AsianInvestor.
She said that as data availability and measurement standards improve, Mercer believes that investors will be encouraged to ramp up their efforts in considering ESG matters in their due diligence and investment decisions.
ESG DEMAND RISES IN ASIA
In Asia, there has been substantial progress in ESG awareness among investors and this is still poised to grow further, according to Jason Zeall, associate director of investments in Asia at Willis Towers Watson (WTW).
“In line with our own observations, many investors find that the adoption of ESG practices can help to bolster the future resilience of their portfolios,” Zeall told AsianInvestor.
“Particularly in Asia, we are also hearing from larger investors that there are lingering questions on the sufficiency of ESG-focused products and services in the market, notwithstanding a lack of dedicated resources internally as well, although that would have helped further adoption.”
However, there is a clear expectation that regulatory and stakeholder pressure for ESG investment and disclosure will increase.
Zeall said WTW encourages investors that have not adopted ESG standards as part of their due diligence and investment processes to consider doing it earlier rather than later.
Preqin’s 2022 H1 Investor Outlook surveyed more than 350 limited partners (LPs) investing across alternative assets. It also revealed that nearly three-quarters (72%) of investors believe fund managers are adopting ESG policies because of pressure from existing and prospective LPs.
This motivation is well ahead of alternative drivers such as industry standards or best practices (cited by 48% of LPs), political pressure (36%), regulatory demands (25%), or outperformance (14%).
Although political pressure was only at 36%, this driver climbed from seventh most important factor to third over the past year.
The survey also found that 37% of investors in alternative asset classes have an active ESG policy in place. Private equity investors are in the lead, at 43%, followed by private debt and infrastructure, at 39%. Hedge fund investors (30%) trailed the field for the second successive year.
Dealing with private assets that have no formal demand for publishing data means that ESG reporting that ensures transparency for investors has become key for fund managers within the alternative investment sector.
Meanwhile for investors, the quest for ESG integration has become clearer and louder, according to Mercer’s To.
“This has started to drive better disclosures concerning private assets, which then creates a positive feedback loop that allows investors to make better-informed risk-return analysis, and uplifts the ESG reporting standards that they expect of the assets,” she said.
Instead of adopting a wait-and-see approach, investors should actively take part in shaping the ESG disclosures that they want to see. Mercer has observed more collaborations among investors and industry associations to drive meaningful and comparable ESG data collection in private markets.
WTW’s Zeall also sees transparency as important. However, he points to harmonisation of standards as equally important to ensure comparative reporting on ESG metrics.
“That is why we encourage managers to work with each other and LPs to align on a standardised set of ESG metrics and mechanism,” Zeall said.
Both To and Zeall highlighted the ESG Data Convergence Project organised by Institutional Limited Partners Association (ILPA), where both Mercer and WTW are members.
The project aims to streamline the private investment industry’s historically fragmented approach to collecting and reporting ESG data in order to create a critical mass of meaningful, performance-based, comparable ESG data from private companies.
Among the Asian members are Japan’s Nippon Life Insurance, Dai-ichi Life Insurance and Japan Post Insurance.
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