A wind farm in South Africa
Research from PwC shows that ESG private market assets could hit between €775.7bn and €1.2tn by 2025, up from €253bn in 2020 © Bloomberg

The rise in demand for sustainable investments is driving a “structural reboot” of private market investing in Europe, with environmental, social and governance funds on track to account for up to two-fifths of the industry’s assets in just a few years.

According to research from PwC, ESG private market assets could hit between €775.7bn and €1.2tn by 2025, up from €253bn in 2020, as regulation and client demand force an overhaul of private equity, real estate, infrastructure and private debt funds.

The PwC forecast suggests that ESG assets could comprise 27 to 42 per cent of Europe’s entire private markets asset base in 2025, up from nearly 15 per cent last year.

Olivier Carré, financial services market leader and sustainability sponsor at PwC Luxembourg, said the research was “bullish” on the outlook for ESG growth in private markets.

He said new rules such as the EU’s sustainable finance disclosure regulations were changing Europe’s investment landscape, with PwC’s research finding that about a third of the respondents it surveyed cited regulatory developments as one of their primary drivers for revamping their investment processes with respect to ESG.

“We think [ESG will result in] a structural reboot of the industry,” he added. “We strongly believe that [general partners] with strong ESG skills and focus will not only have better investment performance but also higher shareholder and stakeholder recognition.”

He said growth would be primarily driven by a wave of new private market funds focusing on ESG investing, rather than older products being rejigged to invest sustainably.

Chart showing how ESG is reshaping European private markets

PwC said that in its best-case scenario where assets in ESG private markets funds hit €1.2tn, three-quarters of that would come from new fund launches.

In recent months, asset managers have rushed to launch private market ESG funds. Last week M&G’s private assets division announced a sustainable senior secured loan fund that would exclude companies involved in activities such as thermal coal, oil and gas while focusing on investing in green, social, sustainability-linked loans and bonds.

Earlier this year, Tikehau Capital unveiled a private equity strategy dedicated to decarbonisation in North America, while Mirova launched an impact private equity fund in September and KKR, the New York-listed private equity manager, raised $1.3bn last year for its first global impact fund.

PwC predicted that ESG assets under management in European private equity funds would hit €292bn under its base-case scenario by the end of 2025, while real estate ESG assets would almost double to reach €153.2bn and infrastructure sustainable assets could hit €252bn.

Sustainable investing has grown rapidly in recent years, on the back of strong demand from pension funds and other investors. Much of the focus so far has been on ESG in public markets, but Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, a membership group focusing on the investment industry’s role in tackling global warming, said investors were increasingly keen to understand the eco-credentials of private equity, real estate and other real assets.

She added that asset classes such as infrastructure could play a vital role in helping finance green assets needed to transition to a lower-carbon economy.

Will Jackson-Moore, global private equity, real assets and sovereign funds leader at PwC, said private markets managers needed to put “ESG at the centre of their investment, risk mitigation and alpha creation strategies”.

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