Environmental, social and governance assets among private markets managers in Europe could rise to €1.2 trillion ($1.39 trillion) by 2025, according to a report from PwC Luxembourg.
For the report, "EU Private Markets: ESG Reboot," PwC Luxembourg surveyed 200 general partners and 200 limited partners representing €46 trillion in global assets under management.
The report predicts ESG assets will account for 27.2% to 42.4% of the likely private markets AUM in Europe, up from 14.8% of a total of €1.7 trillion AUM in 2020, representing about €253 billion.
"In this fast-evolving landscape, general partners will be increasingly required to adapt along with the winds of change, positioning ESG at the center of their investment, risk mitigation and alpha creation strategies," said Will Jackson-Moore, global private equity, real assets and sovereign funds leader at PwC Luxembourg, in a news release announcing the report. "Those that successfully harness ESG's sheer value creation and protection potential stand to secure — or even enhance — their competitive positioning."
The report says the forecast is driven by four catalysts that are placing ESG and sustainability at the forefront of private markets investing: Shifting societal values, changing investor behavior, policy shifts and regulatory changes, and ESG's value creation and risk mitigation power.
When asked what their main drivers are to invest in ESG, 41% of survey respondents each said risk management and corporate values, and 35% said risk-adjusted returns. Multiple answers were accepted.
Also, 100% of limited partners surveyed that do not currently invest in ESG in private markets said they plan to do so in the next 24 months.
Of those who currently invest in ESG funds, 63% said they plan to increase their allocations to ESG funds in the next 24 months.
Those limited partners also plan to direct more resources to social and environmental concerns in the next 24 months.
When asked which aspect of ESG currently has the highest weighting, 49% said governance, 31% said all were equally weighted, 13% said social and 7% said environmental. When asked what they believe will be the most prevalent in the next 24 months, 36% said governance, 30% said equal weighting, 20% said social and 13% said environmental.
The report also notes: "As regulators and society increasingly urge LPs to incorporate sustainability considerations within their investment policies and operations — and as these LPs increasingly awaken to ESG's value creation and risk mitigation potential — GPs will likely see the demand for their non-ESG funds slow considerably."