A look back at ESG in 2023 – an important year in shaping the private market ESG landscape.
The year 2023 was another volatile one for private market ESG, with the introduction of ground-breaking regulations and an uptick in debates over its efficacy. However, although opposition to ESG grew, 2023 still managed to build upon progress made in 2022.
In the EU, SFDR regulations continued their march forward with new taxonomy and the rollout of product-level disclosure. In the US, federal regulation remained stagnant, save for the SEC’s Names Rule impacting 1940 Act funds, while states pursued their own respective agendas and remained split on ESG in principle. As for APAC, the energy transition became more pressing, particularly in China, India, and Indonesia.
Overall, the mix of both progress and conflict throughout last year 2023 is indicative of the issues ESG will face in the coming decade.
For more insights into private market ESG in 2023, download our annual ESG in Alternatives 2023 report.
2023 marked an important year in shaping the private market ESG landscape. The EU remained at the forefront of regulation and was consistently the first region to put forth comprehensive regulatory structures. There were further signs of encouragement for ESG such as growing commitments from investors, while interest in ESG was the driving force for asset managers’ buy-ins of ESG policies in a turbulent environment.
Parallel to growing LP commitments to ESG and the build-up of regulatory structures in the EU, ESG affiliations will likely continue to play a critical role in accrediting private market players, connecting investors, and adding transparency to the growing ESG industry.
For more details on LPs’ interest in ESG: LPs’ commitment to ESG policies intensifies
To learn and understand various ESG affiliations: ESG affiliations under the microscope
In the US, inaction at the federal level left states to their own devices, with approaches differing on a state-by-state basis. For example, California’s legislature has put plans in place for climate-related financial disclosure by 2026, while Texas and Florida explored anti-ESG agendas.
Meanwhile, the SEC has deferred decisions on most ESG regulations until 2024, but did put in place the Names Rule, an attempt to reduce greenwashing and curb misleading fund names for funds under the Investment Company Act of 1940. While the world waits to see if 2024 will lead to federal regulation, 2023 saw the Tennessee Attorney General sue BlackRock over its ESG practices. This lawsuit highlighted the stance that ESG considerations and return-driven strategies are mutually exclusive. How the courts handle the case will likely impact ESG throughout the country.
For more information regarding the state of ESG in the US: ESG in the US: pressures, politics, and profits
As ESG strategies in alternatives continued to evolve in 2023, one area they easily translated into increasing returns was real assets – specifically real estate and infrastructure. ESG and real assets have synergy in that the outcomes of reducing carbon emissions and generating returns are aligned through increasing an asset’s efficiency.
Moreover, while there is significant research demonstrating ESG’s positive impact on returns across all asset classes, real assets do not have to clear the same hurdle of challenging institutionalized strategies as private equity does. For investors and fund managers looking to integrate ESG at their firms, value-add real estate is likely an easier entry point.
For further insights on real assets and ESG:
ESG-committed real estate funds show early signs of outperformance
Value-add through an ESG lens: can you make the old sustainable?
With the arrival of the first El Niño in years, 2023 was the hottest ever recorded in the Northern Hemisphere. The US alone experienced 25 climate events, with over $25bn in losses, an increase in extreme events of about 40% from the year prior. The high temperatures led to some of the most serious wildfires in history, and spanned the globe from Hawaii to Canada, and Algeria to Greece. Another climate disaster came in the form of floods in Libya, erasing a quarter of the city of Derna.
As natural disasters continue to occur, investors may seek to mitigate future damage by committing to low-carbon assets, technologies, and strategies that could reduce the negative impacts of their portfolios. Investing in renewables and clean technology offers private capital the opportunity to get into industries early and lock in long-term returns. For example, transitioning from fossil fuels to renewables is a significant undertaking, one that requires support from governments and the cooperation of stakeholders. Nonetheless, it could present investors with an opportunity to secure returns from a future that demands renewable energy over the current fossil fuel mix.
For more about decarbonization:
Building a low-carbon future through alternatives
The increasing cost of carbon and ways to reduce emissions
Decarbonizing infrastructure critical to zero-emissions goals
For specific information on China: ESG in China 2023: Preqin Territory Guide
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The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.