Environmental, social and governance (ESG) trends present investors with one of the most meaningful sets of challenges and opportunities across private markets. According to PwC, in the base case scenario, sustainably managed assets are estimated to reach about US $34tn by 2026. Of that amount, private market ESG assets under management is estimated to reach US $2.7tn during the same period. Reinforced by regulation, the reasons for this remarkable shift are threefold:

• Despite a palpable shift in attitudes about environmental, social and governance (ESG) investing, particularly in the United States, there is evidence that capital inflows are rising in certain sustainable investing categories, including private assets.
• Changing preferences, materiality, and opportunities - reinforced by regulation – propelled ESG growth in public markets and are increasingly incentivising similar dynamics in private markets. As a result, investor interest in applying ESG to the private sphere is rapidly rising.
• In establishing a framework for ESG investing in private markets, having a robust foundation in fundamental analysis expertise in public markets can help inform best practices and decision making. At Fidelity, they combine their bottom-up research capabilities to apply an ESG lens across the investment cycle – sourcing, ownership, and exit. However, significant differences exist between ESG investing in private versus public markets. These arise from factors such as the time horizon of investments, information availability, ownership structure and channels of influence.
• ESG data in private markets are generally less consistent if they are available at all, making sustainability-aligned investments more challenging than in public markets. However, asset owners potentially have more time, control, and influence to enact change. They are putting this approach into practice through direct lending, collateralised loan obligations (CLOs) and direct real estate strategies, demonstrating how ESG investing in private assets has the potential to mitigate risk and add long-term value.

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