Global ESG-focused private markets (PM) assets under management is anticipated to surge over the next few years, with a significant majority of LP investors planning to increase allocations to ESG investments, and more than three quarters intending to stop investing in non-ESG products over the next two years, according to a new report by professional services firm PwC.

For the report, GPs’ Global ESG Strategies: Disclosure Standards, Data Requirements & Strategic Options, released by PwC Luxembourg, the firm surveyed 300 GPs and 300 LPs across the U.S., EU, UK, and Asia Pacific.

The report follows several years of increasing ESG AUM in private markets, rising from around $600 billion in 2015 to $1.1 trillion in 2021, with PwC forecasting the pace of growth to increase further, with a 2026 base case AUM forecast of $2.7 trillion, and as high as $4.5 trillion in the “best case” scenario.

The forecast comes as private markets investors surveyed by PwC indicated strong intentions to allocate more capital to ESG investments, with 87.5% of LPs surveyed reporting plans to increase their private markets ESG investments over the next two years – including more than a third planning increases of more than 20% – and asset managers responding with 86.5% intending to expand their ESG private markets offerings over the same timeframe.

Many of the investors signaled a shift to an “ESG or nothing” philosophy, according to the report, with over 76% of LPs reporting intentions to stop investing in non-ESG PM products, and a similar number of GPs planning to stop offering non-ESG products.

Olivier Carré, Financial Services Market Leader at PwC Luxembourg, said:

“The global Private Markets landscape is on the verge of a substantial ESG-led transformation. LPs across the world have been increasingly focusing on ESG considerations across the different PM asset classes, while GPs who fail to adapt to changing Investor demands risk losing business from the fast-increasing number of ESG-oriented investors.”

The report also examined the investors’ views of the changes in the ESG regulatory landscape in their respective markets, finding that most investors generally were in favor of recent regulatory developments and direction. In the EU, for example, over 60% of LPs and 57% of GPs reported being either satisfied or very satisfied with ESG-related regulations including SFDR and the EU Taxonomy. LPs and GPs diverged, however, on some aspects of their views of regulations. LPs, for example, were most positive on the impact of regulatory developments on addressing greenwashing concerns, with 64% satisfied in this area, while this was the lowest-performing area in terms of satisfaction for GPs, at less than 50%.

Similar trends were found in the UK, with 59% of LPs and 58% of GPs satisfied with the impact of ESG-related regulations such as SDR and the UK Taxonomy, and with 63% of LPs satisfied on the greenwashing aspect, compared to only 53% of GPs.

US investors were the most optimistic on the impact of ESG regulations in their markets, with around 70% of both LPs and GPs satisfied with proposed SEC ESG-related rules. Investors in the U.S. were also found to be strongly in favor of the development of a “US Taxonomy,” similar to those underway in the EU and UK, to help identify sustainable economic activities and help avoid greenwashing.

Asia Pacific LPs were the least satisfied with regulatory developments, at only 51.7%, while nearly 60% of GPs were satisfied.

In addition to being the most optimistic on the regulatory front, U.S. investors also reported the strongest intentions to increase ESG allocations, with 97% of LPs and 94% of GPs planning to increase their AUM in ESG PM products over the next 24 months.

While finding strong intentions to increase ESG allocations, the report also highlighted key ESG regulatory-related challenges facing private markets investors. The most commonly identified challenges included conflicts between regional and national regulations, burdensome compliance requirements, which respondents said could be onerous and costly, particularly for smaller scale investors and GPs looking to meet data and reporting requirements.

GPs most often (54%) reported data challenges as a “significant challenge” to ESG integration, followed by increased operational cost at 40%. As GPs look to address these challenges, the report found that many plan to invest in their technology-based and workforce-based ESG data capabilities. While 36.5% of GPs reported that their current process of collecting ESG-related information is entirely automated, 57% said that they plan to fully automate the process within the next two years.

Additionally, 94% of GPs said that they plan to expand their dedicated in-house ESG reporting teams over the next two years, including 20% through hiring external talent, 46% by upskilling existing staff, and 28% pursuing both paths.

Carré added:

“While opportunities and challenges vary greatly from region to region and asset class to asset class, the key message remains the same: rethink the status quo and view your operations and licence to exist through an ESG lens. In doing so, GPs not only stand to minimise financial and reputational risks, but are in fact positioning themselves to unlock the full long-term value creation potential inherent to ESG integration.”

Click here to access the report.