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More private markets managers incorporating ESG into due diligence — survey

Most managers in the private markets industry are keenly aware of risks and opportunities associated with investing with environmental, social and governance issues in mind and have begun incorporating ESG factors into their due diligence processes, said the results of a survey conducted by Makena Capital Management.

In its second annual survey, available on Makena's website, the firm surveyed 154 private market managers on incorporating ESG factors into their investment activities and found a few key trends.

First off, ESG implementation is going up across the board. Of the managers surveyed, 70% incorporate ESG factors into their investment process. General partners with an ESG policy grew 10% year-over-year, with 45% of managers having an ESG policy and 4% in the process of implementing one. Of the managers with a policy, 70% of them adopted or formalized their policy after 2013.

"Across the board, we're seeing people implementing some type of policy throughout their investment process," said Lara Banks, a managing director at Makena Capital Management responsible for portfolio management and manager selection for the firm's traditional and sustainable natural resources portfolios, in a phone interview.

Larger firms are more likely to have an ESG policy, according to the survey, as 68% of managers with more than $20 billion in assets under management have an ESG policy in place. Of the managers with $10 billion to $20 billion in AUM, 71% have a policy in place. This is because larger firms tend to have either a dedicated ESG staff or the personnel capacity to help with reporting and integrating formal ESG practices, Makena said.

Managers that specialize in real estate and natural resources are far more likely to have dedicated ESG professionals, with Makena's survey showing that 35% of natural resources managers have dedicated ESG resources and 33% of real estate managers. By comparison, only 13% of private equity managers surveyed have dedicated in-house ESG professionals.

In addition, real estate managers represented the largest increase across the asset classes surveyed, with such managers having a 30% year-over-year increase in ESG policies.

In last year's survey, although most private markets managers acknowledged the importance of investing with ESG issues in mind, most had difficulty translating these intentions into formal policy implementation. But that is no longer the case.

Ms. Banks attributed this to several factors, from increased client demand to a larger interest in ESG from millennials.

"There are real tangible factors affecting these businesses," she added. "It's easier to do this today because of all the organizations in the space tracking these factors."

Makena Capital has more than $19 billion in assets under management.