Nearly three-quarters of private markets investors would turn down investment opportunities over ESG-related concerns, including 29% that have already done so, according to a survey by alternative investment data and insights provider Preqin.

The survey formed part of Preqin’s annual ESG report, ESG in Alternatives 2023, which also indicated a rapid increase in capital flowing to ESG strategies by alternatives investors, and particularly strong growth in impact funds.

The survey found that over half of private markets investors have adopted an active ESG policy, or plan to within the next year, including over 60% of investors in asset classes including private equity, private debt, real estate and infrastructure. Across the asset classes, only hedge funds have 50% of investors with no plans to integrate ESG policies.

The report found a sharp rise in fundraising for private markets ESG funds over the past few years, with capital raised in 2022 surging more than 3x since 2020 to $92 billion from $29 billion, although fundraising activity appears to have slowed markedly in early 2023, reflecting broader alternatives trends.

By asset class, private equity has dominated ESG fundraising over the long-run, accounting for nearly half of all capital raised since 2014. The report found, however, that the infrastructure fund class is rapidly gaining share, as it is “uniquely placed to deliver societal and environmental change given its capacity to support essential economic developments.” Over the past two years, infrastructure ESG funds raised $71 billion, nearly matching the $75 billion raised by private equity.

Alongside the rapid increase in ESG fundraising, average ESG fund size has grown significantly as well, growing to $575 million in 2022 from under $400 million in 2017. According to Preqin, however, this trend is set to reverse as smaller funds increasingly adopt ESG integration. In 2023 to date, despite a decline in overall fundraising, the number of ESG funds is increasing, indicating smaller fund sizes.

One of the report’s key findings is the rapid growth in impact funds, as impact investing moves from a niche strategy into the mainstream. Capital raised for impact funds surged in 2022 to nearly $34 billion from less than $13 billion the prior year, and from only $2.6 billion in 2019. While European investors have dominated ESG capital raising – accounting for 79% of fundraising since 2014 – North American investors have accounted for the majority of impact fundraising, representing 53% over the past 10 years.

The report also highlighted the key drivers of ESG adoption by alternatives investors, with a proven link between ESG and financial performance as the top-cited reason by 55% of respondents, followed by regulatory or legal requirements, and demand from clients. Interestingly, despite performance claimed as the key driver, only 23% of respondents reported the view that ESG funds tend to perform better, while 55% said that they believe the funds tend to perform about the same as other funds. According to the report, “it seems investors consider ESG as a means to manage downside risk.”

Alex Murray, VP, Head of Real Assets, Research Insights, at Preqin said:

“This report comes at a time when ESG faces new challenges from increasingly vocal and politicized critics. Further, a re-focus on performance after a challenging 2022 may have encouraged some to de-prioritise ESG with fundraising so far in 2023 reflecting this. However, impact investing is emerging as its own distinct market. Rather than retrenching as many had anticipated, ESG in Alternatives is increasingly diverse and sophisticated in what it can offer investors.”

Click here to access the report.