ESG Report on Global Alternative Investment
LGT, Europe’s largest alternative investment asset management company, released a ESG report on global alternative investment. LGT interviewed more than 300 investment managers to summarize the ESG issues involved in their investments.
LGT believes that ESG is an essential framework for the alternative investment industry. Honest and rigorous ESG practices will affect investment profits and bring new risks and opportunities in the long run. Numerous regulatory agencies around the world have developed numerous ESG information disclosure frameworks in order to regulate ESG development and reduce the possibility of greenwashing.
ESG Development in Private Equity Industry
Since the investment target of private equity is in the non-public market, it is more difficult for investors to obtain ESG data. LGT and other alternative investment institutions launched the ESG Data Convergence Initiative (EDCI), which aims to provide clear and standard ESG indicators to help the private equity industry measure the ESG performance of investment targets. As a European asset management institution, this action also complies with the regulatory requirements of the Sustainable Finance Disclosure Regulation (SFDR) for the asset management industry.
In the SFDR framework, Principal Adverse Impact (PAI) is the core content of investors’ attention. Investors need to report PAI indicators to measure whether the investment has a negative impact on sustainability. LGT found that 27% of investment managers already track PAI metrics and use private equity databases to perform proxy analysis on some metrics. These analytical methods play an important role in the practice of SFDR.
In terms of private equity ESG ratings, 30% of investment managers have reached the excellent level, 40% have reached the good level, and 24% have reached the fair level. A high ESG rating means that investment managers have integrated ESG frameworks into portfolio analysis. In terms of regions, 82% of investors in Europe received excellent and good ratings, 79% in Asia, and 49% in the Americas. This result suits well for ESG development status in these regions.
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Among the ESG issues, private equity investors pay the highest attention to climate change-related risks and opportunities, reaching 55% (32% in 2021 and 43% in 2022). Among climate change-related monitoring, the monitoring of greenhouse gases accounts for the highest proportion, reaching 48%.
ESG Development in Private Debt Industry
In the investment management of private debt, the actions of investors are similar to those of private equity, involving ESG controversy check, SDG impact assessment, PAI indicator monitoring, climate-related disclosure, etc. Overall, 81% of investors have reported the carbon emissions of their debt portfolios (45% in 2021, 57% in 2022). For every €1 million invested, the average GHG intensity of the debt portfolio is 28.4 tons of carbon dioxide. This metric means that these private debt investments could reach net-zero emissions by 2050, or even earlier.
ESG Development in Hedge Fund Industry
Due to the lack of information disclosure in the hedge fund industry and the fact that many investment managers are not located in Europe, the number of compliances with the SFDR regulatory framework is relatively small. In the survey, LGT mainly checks their ESG exclusion policy, top-down ESG assessment and portfolio monitoring.
LGT believes that the improvement of regulatory policies and the needs of investors are important factors to promote the development of ESG. All respondents already demonstrated some commitment to ESG. In terms of ratings, a total of 69% of hedge fund managers this year have reached an excellent or good level (25% and 64% in 2021 and 2022, respectively). A total of 73% of the ESG ratings of assets under management have reached an excellent or good level (25% and 69% in 2021 and 2022, respectively).