A recent survey by Apex Group, in association with professor Amin Rajan of CREATE-Research, showed that 88% of pension funds surveyed view private equity as a suitable asset class for ESG investing.

The research – which surveyed 152 pension funds globally, with 54% from the public sector and 46% from the private sector – looked into what are the current allocations to private equity and private debt, what factors are constraining allocation to these asset classes and whether these asset classes are attractive for ESG investing.

It also explored what factors are likely to drive allocation over the next three years and how can asset managers evolve in order to attract higher allocations.

Apex said that recent years have seen private equity and private debt grow in popularity for pension fund allocators, with alignment to ESG principles gaining attention over the same period.

However, pension funds, attracted by greater resilience demonstrated by private equity and private debt during short-term economic cycles and volatility, are demanding ever more scrutiny of ESG strategies in these asset classes, it added.

Emma Bickerstaffe

Emma Bickerstaffe at Apex Group

According to the survey, 35% of pension assets now have overt ESG goals, with 88% of pension funds surveyed viewing private equity as a suitable asset class for ESG investing to either some or a large extent, with this figure falling slightly to 82% for private debt.

The research found that there is still significant capacity and appetite for this market to grow. Of pension funds invested in private equity, 24% have no ESG allocations, while 57% only have allocations of up to 5% and just 19% have allocations of over 5%.

In private debt, it found that 34% of pension fund respondents have no ESG allocations, 57% have allocations of up to 5% and 9% have allocations of over 5%.

Nearly three-quarters (73%) of pension funds surveyed said that they are looking to maintain or increase allocations to ESG-related funds in the next three years.

Apex added that despite the growing number of private market funds adopting ESG principles, a number of factors have “acted as a drag” on institutional allocations to ESG aligned private equity and private debt funds.

These include concerns about greenwashing which were reported by 47% of respondents to have dampened investor appetite, while 51% highlighted the political backlash against ESG in the US as a risk factor.

Emma Bickerstaffe, managing director for ESG and sustainability at Apex Group, said: “Private markets continue to attract institutional investment, offering strong growth prospects as well as the ability to weather shorter-term market volatility, and an ever-growing alignment with ESG principles.”

However, she added that with growing scrutiny from regulators, pension plan members and other stakeholders, allocators will be more discerning when it comes to selecting funds in which to invest.

She said that ESG values need to be embedded in the corporate DNA of asset managers, through for example, the linking of private markets executive compensation with ESG outcomes and by ensuring that sustainability reports provide verified information and narrative disclosures that offer concrete examples of the challenges, actions and outcomes behind the numbers.

She continued: “Our data show that despite the noise of recent months, ESG is here to stay as a key consideration for allocators, and the dynamism and growth focus of the private markets mean that they are well placed to help their portfolios become ESG aligned.”

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