What Is Driving SRI Adoption in Private Markets?

New technologies are expected to drive the adoption of socially responsible investing (SRI) strategies within the universe of unlisted assets, according to new research.

Preqin, a specialist in data for unlisted real assets, private equity, private debt and hedge funds, found that a majority of investors it surveyed believed that new technology would improve investor reporting and fund operations over the course of the next five years.

The research found that 59% of asset managers operating in private markets did not make use of big data in their investment processes. However, 42% said they expected to have some big data tools within their processes by 2025.

The Future of Alternatives 2025 survey found that nearly 80% of managers said they would increase their environmental, social and governance (ESG) investing practices by a ‘moderate’ or ‘significant’ amount over the next few years. Just 1% said it would have a lesser influence on their business than it does currently.

Dave Lowery, head of research insights at Preqin, said: “Driven by regulations and investor demand, ESG investing has gone from being a niche market to the mainstream and has reached critical mass as of late 2020.

“Industry professionals already see the relationship between positive impact and investment performance. Investor demand for more information and advances in data analytics will also drive data-oriented organizational transformation; fund managers will need to develop clear data strategies going into 2025.

“And, while regulation of alternatives assets is increasing and impacting different markets, it is also creating new opportunities; regulations such as carbon reduction will create investment opportunities in technology and infrastructure for energy efficiency, renewable energy, and low-carbon technologies.”

Regulation was the main driver of ESG trends in Europe, Preqin said. The European Union has introduced a Sustainable Finance Taxonomy as well as other measures, which has led to 63% of the $2.5 trillion invested into private markets in Europe since 2011 being managed according to ESG principles.

However, in North America there was “considerable room for improvement”, Preqin said. While investors have allocated more than $6 trillion to ESG strategies in private markets over the past 10 years, this accounted for just over a third of total new investments.

The Preqin survey also forecast that total private markets assets under management would swell from $10.7 trillion in 2020 to $17.2 trillion in 2025 based on the vast majority of investors (81%) saying they expected to increase allocations over the next five years.