A majority of German institutional investors (83%) take ESG and sustainability criteria into account in their investment decisions, according to a recent research study conducted by Union Investment.

This is the highest figure since Union Investment’s annual investor survey was introduced in 2010 and, furthermore, they are choosing to invest sustainably on the basis of their own convictions, the research showed.

Speaking at the SuperReturn International conference in Berlin this week, Ralph Schnell, managing director, head of alternatives at Siemens Fonds Invest, said the scheme had dropped “the most successful investment fund from its portfolio”, which had returned nine times above its benchmark, because it was not “comfortable” in terms of its ESG criteria.

KENFO, Germany’s nuclear waste management fund, expects General Partners (GPs) in private equity to understand what is acceptable from an investment point of view in terms of ESG, head of investment management Verena Kempe said, also addressing the SuperReturn conference.

She gave the example of passing on inflation in infrastructure and real estate contracts: “You have to ask yourself if this is an acceptable behaviour.” She added that KENFO has also dropped certain strategies because of a lack of governance.

Union Investment’s 2022 survey, which surveyed 203 German institutional investors, also showed that the proportion of institutional investors investing sustainably is up by 5 percentage points on 2021 and by 18 percentage points on 2018, and is at a record level.

“As sustainable investments become increasingly prevalent, we are also seeing a change in investors’ attitude towards them. This year was the first in which investors’ own convictions were the most commonly cited reason for taking into account sustainability criteria, at 21%,” said André Haagmann, member of Union Investment’s board of managing directors responsible for institutional clients.

Regulatory requirements (14%) are therefore no longer the primary driver behind sustainable investments, as they had been in the previous year, the research suggested.

“Investor attitudes are changing. Sustainability is now an integral part of their investment strategy, instead of being something of a box-ticking exercise as before,” Haagmann said.


Private credit remains solid despite volatile market

Investors are observing a robust private credit market under the current environment of rising interest rates, high inflation and market volatility.

HarbourVest continues to see increasing appetite from investors for private credit, an asset class that has proven to be resilient, managing director Karen Simeone said, speaking at the SuperReturn international conference in Berlin this week.

She said that private equity firms are keeping up with demand for private credit to finance acquisitions, adding that with higher yields, the best placed managers are the ones “who have access to high quality deals and are disciplined to put recession-resistant businesses into their portfolios”.

Karen Simeone at Harbourvest

Karen Simeone, Harbourvest

Market volatility has created tailwinds for private credit, according to Manon Mendez, Principal at Blackstone Credit, who has seen deal volume pick up in the last few months.“I am optimistic about the future of private credit […] it is very fast becoming one of the most important alternative asset classes for investors,” she added.

For Raphaëlle d’Ornano, founder and managing partner at d’Ornano + Co, the price dynamic on the public market is also reflecting on private markets, although “not to the same extent”. With discount rates increasing, “cash burning” companies suffer the most as a large part of their cash flow generates in the future, she explained.

The asset class that is suffering the most is venture capital, she added.

In private credit the trend towards ESG ratchets is laying bare a difference in terms of approaches in the US and Europe. In Europe borrowers can receive a 10-15 basis points discount by meeting certain ESG targets, while in the US this approach is not widely adopted yet, Simeone said.

HarbourVest evaluates ESG in multiple ways in any single transaction, looking at private equity sponsors with ESG ratings, she said, adding that in the US ESG comes into play in deals mostly through negative screenings.

Blackstone works closely with companies and external advisors to come up with key performance indicators (KPIs) that are clearly measurable, Mendez said.

The asset manager has recently set up a sustainable resource group to invest in energy transition and climate change solutions. It has deployed more than $10bn in the space so far and it could invest $100bn in total in the next decade, she added.

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