'Alternative funds such as real estate under pressure due to inadequate ESG policies'

Private equity firms and hedge funds are under increasing pressure to adopt ESG policies and integrate sustainability factors into their investment portfolios, according to a new study by global accountant and consultant EY. The study focuses on alternative investments, including real estate.

This is according to a report in ESG Today, a leading news source for the latest developments on ESG. For the new '2022 EY Global Alternative Fund Survey', prepared in collaboration with Coalition Greenwich, interviews were conducted with 114 hedge funds representing more than $1.7 trillion in AUM, 112 private equity firms representing more than $2.8 trillion in AUM, and 61 institutional investors with about $1.3 trillion in assets under management. The survey covered topics ranging from industry trends, long-term positioning, talent management, investment products, the regulatory environment and strategic priorities.

The report shows that alternative asset managers are increasingly scrutinised on ESG issues, with 26% of investors reporting that they decided not to invest with a manager this year because of inadequate ESG policies, up from 20% a year ago.

Only 11% of investors said managers' ESG policies do not affect their decisions to invest or remain invested, while 36% reported that these factors are "important" or "critical" to these decisions.

While managers may be under pressure to improve their ESG policies, they may also have opportunities to provide ESG-focused solutions for their clients. While only 14% of investors reported that they are currently required to invest in socially responsible products, another 29% expect that they will be required to do so in the next 2-3 years. More than a third of investors said they currently invest, or plan to invest, in ESG-specific funds.

The report also examined the key ESG characteristics considered by investors in their investment decisions, with governance and climate risk being the top areas of focus, reported by 63% and 61% of investors respectively, followed by human rights practices and DEI (diversity, equity and inclusion), each at 41%.

While alternative asset managers appear to be responding to investors' ESG demands, there is still much room for improvement: the report shows that just over half of managers (53%) currently integrate ESG risks and considerations into their investment decisions, and 18% have not yet adopted a formal ESG policy.

In the report, EY writes:  ‘Meeting investor ESG policy and reporting requirements is becoming increasingly important, as 26% of investors decided in 2022 not to invest with a manager because of inadequate ESG policies, a five-point gain from 2021. This increase should serve as a warning for managers to take investors’ demands for appropriate ESG policies and reporting seriously. Managers who neglect this trend may lose out on investor interest and capital allocations.’