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Asset Owners Applying ESG Factors to Alternatives

Negative screening no longer most popular approach to ESG investing, according to BNPP report.

Asset owners are increasingly integrating ESG-related factors into their investment decisions across a diverse range of alternative asset classes, according to ‘The ESG Global Survey 2021’ report published by BNP Paribas Securities Services. The survey collected data from 356 institutional investors across 19 countries spanning the US, Europe and APAC, with an estimated US$11.3 trillion in assets under management.

Use of ESG-related inputs is still most prevalent in equities (66%) and fixed income excluding green instruments (43%). However, 47% of asset owners said they consider ESG factors when investing in infrastructure, as well as 41% across private equity/debt assets and 39% across real estate.

“The practice of including ESG considerations across these asset classes is more prevalent among asset owners than asset managers,” said Delphine Queniart, Global Head of Sustainable Finance and Solutions, Global Markets, at BNP Paribas, speaking during a webinar launching the report.

Around one third of asset managers integrate ESG when investing in infrastructure (30%), private equity/debt (34%) and real estate (34%) assets, the report noted.

“Infrastructure strategies have the clear potential to influence positive longer-term environmental outcomes and investment horizons, which aligns strongly with the investment horizons of asset owners,” said Queniart.

Private equity investments are also proving popular because of their high-growth potential, allowing for diversification away from equities.

“These investments are considered more high risk, so they typically only account for a small portion of a larger portfolio,” Queniart said.

Institutional investors allocated nearly 12.3% of their assets to private equity in 2019, according to a report by global management consultancy McKinsey.

However, non-listed assets do face greater challenges than listed investments overall, such as a lack of standardised measurements and visibility of ESG-related performance.

Despite this, Queniart argued that “they have considerable potential for impact”, due in part to the potentially greater influence of private equity owner with a majority stake, versus a minority shareholder in a listed firm.

This is increasingly being realised in the renewables space, with private investors identifying opportunities to back smaller, non-listed companies providing solutions that will aid the transition to a low-carbon power system.

Shifting approaches to ESG 

While negative screening has typically been one of the most widely used ways of ensuring portfolios minimise ESG risks (e.g., screening for companies financing thermal coal), the BNP Paribas survey noted that asset owner approaches are maturing, with ESG integration proving the most popular method across asset classes.

Almost three-quarters of asset owners (72%) said ESG integration is their preferred approach, although 54% of asset owner respondents still employ negative screening. Across asset owner respondents, 27% said they also employ active ownership, 35% impact investing and 27% best-in-class investing.

Approaches to ESG depend on the asset class, with some better suiting certain strategies compared to others.

“Growing ESG integration across asset classes, not least alternatives (infrastructure, private equity, real estate) is very much encouraging. Asset owners in particular are increasingly integrating ESG factors and looking into impact. This could trigger positive changes from a sustainable perspective, including increasing ESG disclosures and influencing changes from companies,” said Queniart.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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