Focused ESG strategy ‘critical’ to longevity

The growing importance of environmental, social and governance (ESG) and diversity, equity and inclusion (DEI) considerations will transform the fund industry for years to come, according to findings from Ernst & Young’s (EY) 2021 Global Alternative Fund Survey.

The survey, which gathered the views of both alternative fund managers and institutional investors, revealed alternative fund investors were increasing their incorporation of ESG factors into investment decisions, with 75% revealing their scrutiny of managers’ ESG policies had increased over the last two-three years.

In addition, 39% of investors reported they had either ‘passed’ on investing in a manager due to insufficient ESG adoption, or required the manager to make improvements to their ESG policies.

Four out of five investors said climate risk was the primary ESG factor in their investment decision-making, while the majority indicated it was one of the areas of increased focus this year.

Elsewhere in the market, the survey revealed the fund industry saw a substantial uptake in digital assets, as well as special purpose acquisition companies (SPACS) over the course of 2021, with 37% of hedge funds and 28% of private equity mangers confirming they had participated in or were considering participating in SPACs in some capacity.

“The wealth of topics covered in this report — from the ways that ESG considerations are becoming crucial to a fund's future to how a diverse team and strong talent management is increasingly tied to performance — shows the alternatives funds space is in a time of transformation,” said Jun Li, EY Americas wealth & asset management co-leader.

“This report provides an overview of where the industry is today and creates a road map for the themes that will continue to dominate industry conversations in the years to come,” he added.

Last year, data specialist Prequin published a Future of Alternatives 2025 survey that revealed nearly 80% of managers planned to increase ESG investment practices over the next few years, while just 1% said ESG would have lesser influence over their business.