Alternative investment managers are stepping up their environmental, social, and corporate governance efforts including diversity and inclusion, pushed along by investors' increasing demands for accountability.
Investors have been pushing for greater ESG efforts for years but now expect alternative investment firms to take larger strides in this direction.
The Black Lives Matter protests in 2020 brought the issue of diversity to the forefront for some asset owners and managers, while more investors in Europe and in the U.S. are incorporating it into their investment thinking.
According to a recent survey by secondary market alternative investment firm Coller Capital Ltd., 63% of institutional investor respondents expect the private equity industry to accelerate its focus on ethnic diversity within their firms and their portfolio companies, bringing about faster change. The other 37% indicated that increased diversity and inclusion efforts in the private equity industry have been slow to materialize "despite good intentions."
Managers are also moving forward on tackling climate change, spurred on by the pandemic.
In response to investor demand, Carlyle Group Inc. is one of the first alternative investment managers to provide climate change disclosures under the Financial Stability Board's Task Force on Climate-related Financial Disclosures, said Megan Starr, New York-based principal at Carlyle and the global head of impact.
"Our financial incentives are increasingly aligned with being at the forefront of the energy transition and how to do it faster because we see it impacting exit multiples in a positive way," Ms. Starr said. "If you take an oil and gas company from zero to 40% renewables during the hold period, you could potentially double the company's trailing EBITDA multiple."
Ms. Starr said that she sees 2021 as the year of adoption for a greater number of alterna- tive investment firms. Carlyle executives think that TCFD will become the leading framework globally, she said.
Managers are recognizing that they need to do more to more with regard to climate change.
"I think organizations are increasingly comfortable that they haven't achieved climate nirvana," she said. "You can own where you are today and set the goals of where you want to go."
ESG offerings have transitioned to mainstream from niche, said Pratap Singh, director, private equity and venture capital at research provider Acuity Knowledge Partners. Forty-two percent of the capital raised for alternative investment funds in 2019 was for ESG-focused funds, up from 33% in 2011, Preqin data shows.
This trend has been driven by large alternatives managers such as The Blackstone Group Inc., Apollo Global Management Inc. and Carlyle Group, with each manager including ESG mandates for all their funds regardless of their respective strategies, Mr. Singh said. "The pandemic has accelerated the acceptance of ESG offerings by alternative investment managers as they seek to gain a competitive advantage once markets normalize," he said.