October 27, 2011
More Alternative Investment Funds are Embracing ESG
by Robert Kropp
US SIF and Tellus Institute report that sustainable investment strategies by alternative investment
funds increased to $80.9 billion in assets under management by 2011.
Sustainable investment strategies by alternative investment funds such as private equity, property,
and hedge funds are up 15.9% since 2010, according to a new report prepared for US SIF: The Forum for Sustainable and Responsible
Investment by Tellus Institute.
An earlier study entitled 2010 Trends Report,
published by US SIF last November, found that alternative investment vehicles that incorporate
environmental, social, and corporate governance (ESG) criteria grew by 613% between 2007 and 2010.
The new report—Sustainability Trends in Alternative
Investments in the United States--indicates that the impressive growth rate continues.
By 2011, the new report found, alternative investment funds embracing sustainable strategies
increased in number from 346 in 2010 to 375. Assets grew from $69.8 billion to $80.9 billion during
the same time. The authors point out that the report's estimates are conservative, "because not all
alternative asset managers were willing to disclose their funds' assets."
Of the three
asset categories studied in the report—private equity and venture capital; property and real estate
investment; and hedge funds—the greatest amount of assets was invested in property and real estate.
However, while property and real estate investment assets accounted for $44.3 billion under
management in 95 funds, the number of private equity and venture capital funds, at 233, was
considerably higher. Total assets managed by private equity and venture capital funds amounted to
Hedge funds, with 47 funds and $2.6 billion under management, were the
smallest of the three categories. As the report points out, sustainable investment strategies by
hedge funds have given rise to "vocal debates;" in 2009, for instance, Jed Emerson wrote in a personal
reflection, he reported that he had received "heartfelt suggestions…that hedge fund investing
was, at its core, mercenary capitalism at its worst."
Nevertheless, the US SIF report
found, "Although still a relatively small segment of ESG alternative investment vehicles, hedge
funds are also now among the fastest growing."
"The majority of the alternative fund
managers we reviewed consider several ESG criteria simultaneously, but environmental factors
predominate," US SIF Deputy Director and Research Director Meg Voorhes said. "In particular, we see
interest in green building, climate change issues, clean technology, renewable energy and energy
efficiency." When ranked according to individual
criteria, however, governance was considered most according to total assets, with $37.2
Among the factors driving the adoption of ESG by alternative investment funds was
the establishment in 2008 of the PRI private equity work
stream by the United Nations' Principles for
Responsible Investment (PRI). According to the report, PRI worked with the Private Equity
Growth Capital Council "to encourage some of the largest and most well-known private-equity firms
to embrace responsible investing principles."
In early 2009, the US-based Private Equity Council (PEC)
announced that its members have adopted a set of investment guidelines that address ESG issues in
accordance with PRI, and committed to meeting with PRI twice annually to maintain a dialogue on the
guidelines and other ESG issues.
US SIF CEO Lisa Woll described a "wide range of investors
– high-net-worth families and individual 'angel' investors, mission-driven institutional investors
such as philanthropic foundations, hospitals and faith-based institutions, and some of the largest
and most prominent pension funds and private equity firms" that now invest in sustainable
"The growth of the SRI alternative investment market is being
supported by an ecosystem of investor networks and field-building organizations working to develop
reliable metrics to evaluate the social and environmental returns of these funds," Woll continued.