Laying bare the size of the opportunity in environmental, social and governance (ESG) appropriate investing, tracker of data on the alternative asset management space Preqin has estimated that as much as $3.1 trillion of private capital assets under management could have an ESG focus.
This is around 36% of the total $8.52 trillion of private capital and alternatives focused assets under management (AuM) that Preqin tracks around the globe.
Investment fund managers with an established ESG policy are responsible for a significant proportion of recent private capital fund raising, Preqin says.
In fact, the data provider estimates that ESG-committed investment managers have raised $403 billion in the first nine months of 2021, compared to $506 billion raised throughout the whole of 2020.
These are asset managers, with an alternatives and private capital focus, that have an ESG investment policy in place.
It does not mean all of these assets are destined to be allocated to funds or asset classes that are truly ESG qualifying and appropriate, but it does give an idea of the scale of the ESG investment opportunity.
With so much private capital having a desire to invest in an ESG appropriate manner it drives home the opportunity to create insurance-linked securities (ILS) products and funds that can truly meet the mandates of the world’s largest ESG allocators.
There are enormous sums that are ESG motivated and real opportunities that meet the stricter mandates, which some of the larger investors have, are few and often far between.
Limited partner investors need to be prepared to quiz their managers on investments, as disclosures are still lacking in a lot of cases, when it comes to ESG.
Preqin said, “LPs will need to continue to ask their GPs the “right” questions and know what specifics are most important to them. As ESG-committed AUM continues to grow, the future for ESG in the alternatives industry will be a combination of client demand and regulatory pressures that will continue to push managers into prioritizing ESG.”
Here, the ILS market has a clear opportunity to create risk transfer products that are ESG appropriate by design, but of course these are at the moment limited in number and amount.
We believe that with such a strong focus on ESG among ILS fund managers and also more widely across the insurance and reinsurance industry, finding the right mechanisms that can harness this capital and its appetite for ESG appropriate returns could deliver huge benefits.
With these benefits able to flow to the managers that can develop innovative ESG ILS structures, as well as to the insurance and reinsurance industry more broadly, in terms of ESG aligned capacity, and these benefits can in future cascade down to the policyholder as well, we’d suggest.
Jaclyn Bouchard, Head of ESG at Preqin commented on its findings, “Over the years, the alternatives industry has come a long way in its understanding of ESG. With an increasing amount of time and money at stake, managers have focused on finding solutions to help them respond to institutional investor demand for ESG. As the largest GPs are first to formally adopt ESG principles, the share of ESG committed funds in private markets will continue to grow from investor and regulatory pressures. With that, market participants — no matter the size — will be expected to increase their ESG transparency to meet expectations and avoid the pitfalls of greenwashing.”
Interestingly, Preqin also highlights the need for high-quality data to support ESG analysis, which is somewhere else that ILS and reinsurance markets could have a head-start, given the data heavy nature of risk modelling, portfolio disclosure and analysis.
ESG investing and the opportunities it presents are a growing focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.