ESG capital raising continues apace, still a driver of investor allocations: Preqin

Despite the backlash against environmental, social and governance (ESG) investing in certain parts of the United States and elsewhere, capital raising for ESG investments, funds and strategies continues apace, and for investors ESG remains a key driver of allocations.

This is according to recent insights from Preqin, who note that there has been a three-fold increase in annual capital raised for ESG investments between 2020 and 2022, rising from $29 billion to $92 billion.

Europe remains the most ESG focused investor community it seems, with some three quarters (79%) of aggregate capital raised going to Europe-based ESG funds, followed by 14% in North America and 7% in APAC.

Given the acceleration in ESG fund raising, the average ESG fund size has also increased, from $400 million in 2017 to closer to $600 million in 2022.

Preqin states that whether ESG helps to drive returns in the longer-run remains a contentious issue.

But what does not seem contentious, is investors appetites for investments with ESG qualities and so what is clear is how ESG can influence deals and investments.

In a survey conducted in November 2022, Preqin found that 29% of investors said they had turned down a deal over ESG concerns, while another 43% reported they would do so.

Preqin’s survey found that 60% of investors surveyed believe ESG to be of average or higher importance in their investment decision making.

In fact, 13% of investors said ESG was of extreme importance as an investment consideration and 26% said it is of considerable importance.

As ever, much of ESG investing is focused on private equity, infrastructure and niches like impact or climate investing.

In fact, insurance-linked securities (ILS) do not get a look in, in Preqin’s report, but the ILS market continues to drive forward the ESG agenda, as too do insurance and reinsurance cedents.

In fact, we’ve seen many more ESG disclosures in catastrophe bond issuance document packs in 2023 than had been seen last year. They are still not a de-facto inclusion, but they are more regularly seen, especially from the large global insurance and reinsurance players that sponsor cat bonds.

We have also heard of some investors turning down certain cat bond opportunities for a lack of ESG alignment, or disclosure, something that is likely to be an issue for any major institution that has an ESG mandate in its investment strategy, which could also drive greater use of ESG disclosure in ILS markets in time.

With ESG investment fund-raising continuing apace, the ILS market will likely continue to look to tap into investor appetite for ESG appropriate asset classes, feeling that natural catastrophe risk and disaster protection remain extremely well-aligned with many ESG goals.