ESG integration in private markets: a global transformation

Writer Samira Joineau
© PwC Luxembourg – Olivier Carré, Financial Services Market Leader (PwC Luxembourg)

Private markets are undergoing a significant transformation driven by the growing focus on environmental, social, and governance (ESG) considerations. A recent report by PwC sheds light on the impact of ESG regulations in the European Union, the UK, the US, and the Asia-Pacific Region.

The report provides valuable insights based on primary data collected from 300 General Partners (GPs) and 300 Limited Partners (LPs) across these jurisdictions. Here are some key findings:

Increased Commitment to ESG

Both LPs and GPs recognize the importance of redirecting private capital towards sustainable objectives. The report reveals that 87.5% of LPs surveyed are planning to increase their ESG investments in the next two years, with over a third targeting increases of more than 20%. Asset managers are responding to this demand, as 86.5% of those surveyed plan to expand their ESG product offerings in the next 24 months, with almost half aiming for an expansion of over 20%.

Opportunity for Growth

Private Equity LPs and GPs currently have the lowest average allocation to ESG products compared to other asset classes. Only 57.4% of Private Equity LPs and 47.6% of Private Equity GPs allocate over 30% of their assets to Article 8 products, falling below the averages recorded among Real Estate, Infrastructure, and Private Debt counterparts.

Added Value in ESG Reporting

The report highlights that 66.6% of LPs surveyed are willing to accept higher management fees in exchange for notable improvements in GPs’ ESG data reporting. Nearly 45% of LPs stated their willingness to pay between 5% and 9% more in management fees if the price increase translates into quality improvements in GPs’ ESG data reporting practices. An additional 23% of LPs are willing to absorb increases in excess of 10%.

Sentiment towards EU Regulation

In the European Union, 60.5% of LPs surveyed expressed satisfaction with the developments in EU regulation. GPs in the region also displayed a high level of satisfaction (57.1%) with the impacts generated by ESG regulation. Notably, 63.8% of EU LPs are satisfied with the regulations addressing greenwashing concerns, while only 49.2% of EU GPs share this view.

The Need for International Alignment

The findings indicate that the global Asset Management community strongly supports the goals of the International Sustainability Standards Board (ISSB). Over two-thirds (68.1%) of the GPs surveyed expect the ISSB framework to successfully harmonize global ESG disclosure standards. LPs showed slightly more optimism, with 72.0% expecting the framework to succeed in its aims.

In a nutshell…

Overall, the private markets landscape is undergoing a substantial transformation driven by ESG considerations. LPs and GPs recognize the need to adapt to changing investor demands and integrate sustainability into their corporate culture and investment processes. The report emphasizes the importance of viewing operations and existence through an ESG lens, allowing GPs to minimize financial and reputational risks while unlocking the long-term value creation potential of ESG integration.

Olivier Carré, PwC Luxembourg Financial Services Market Leader, urges GPs to embrace sustainability and embed ESG data and capabilities at the core of their operations. Failure to do so could result in lost business from the growing number of ESG-oriented investors. Opportunities and challenges vary across regions and asset classes, but the overarching message is clear: reevaluate the status quo and prioritize ESG integration to meet regulatory developments, investor expectations, and differentiate oneself in the market.