Some 57% of asset owners and other institutional investors surveyed believe incorporating ESG into alternative investments decision-making has a positive impact on risk-adjusted returns, said a report Monday from Mercer and LGT Capital Partners.
Only 9% of the institutional investors believe incorporating environmental, social and governance risk factors lowers returns, while 34% believe it has no effect, said the report, “Global Insights on ESG in Alternative Investing.”
In all, 76% of the institutional investor respondents include ESG criteria when investing in alternatives, considering it an important aspect in risk and reputation management. Of the investors incorporating ESG criteria, 54% have done so for three years or less.
The extent to which the institutional investors incorporate ESG varies by alternative asset class.
Among respondents, 33% incorporate ESG to a significant extent in private equity, 27% in real estate, 22% in infrastructure and 7% in hedge funds.
On the other hand, 55% of respondents incorporate ESG to some extent in private equity, 56% in real estate, 64% in infrastructure and 59% in hedge funds.
Only 12% of the respondents don’t used ESG at all in private equity, 17% in real estate, 14% in infrastructure and 34% in hedge funds.
Among the most important ESG risks cited by respondents were environmental issues, including carbon intensity and other climate-change-related issues; social issues, including controversial weapons like nuclear, chemical, cluster bombs, land mines, as well as human rights abuses; and governance issues, including quality of the composition of corporate boards.
The survey covered 97 pension funds, endowments, foundations, sovereign wealth funds and other institutional investors representing more than $1 trillion in combined assets and 22 countries and territories.
The survey was conducted in October and November, Alayna Francis, principal, public relations at Mercer, said in an e-mail.
Mercer’s focus includes investment consulting. LTG specializes in alternative investments with $59 billion in assets under management.