When it comes to ESG investing, perhaps the only thing alternative investors have agreement on is that there is no clear consensus about how, or whether to, approach it. In Dynamo’s final primary research installment of 2023, a global survey of GP and LP investors on environmental, social, and governance topics – which include the subset of diversity, equity, and inclusion (DEI) – the range of fragmented viewpoints were on display.

Something did come through clearly though: regardless of how important asset allocators and asset managers consider ESG to their investment decisions, the lack of accepted ESG measurement and performance metrics seem to be central to investor uncertainty. Both LPs and GPs reported their top ESG challenge is the lack of industry-wide standards. Adding to the challenge, when asked how they are measuring ESG performance, the largest group of survey respondents (38%) said they were using “old-school” manual methods, such as spreadsheets or Word documents.

Old-School Methods Top List For Measuring Modern Metrics

But metrics and measurement were just one issue we covered. Here’s a closer look at what our September through October 2023 survey findings revealed.

ESG is of Growing Importance in Investment Decisions

There appears to be growing consciousness among alternative investors that ESG factors are becoming increasingly important. In Dynamo’s survey, the majority said it had some degree of importance in their investment decisions.

As social awareness around ESG issues increases, more investors are seeking to align their portfolios with their values. With demand for ESG investments growing, particularly among younger investors, we will likely see an increase in emphasis and sophistication of ESG investing strategies.

Greenwashing is a Significant Concern

Arising from investor pain points around the lack of industry ESG standards are noteworthy concerns around greenwashing. More than 60% of survey respondents reported concerns over greenwashing in their current investments, and nearly 50% were worried enough to monitor regularly for signs.

In an already tough fundraising environment, greenwashing erodes trust between investors and companies – and the public, too. But, investors have more leverage and ability to ensure companies live up to claims of sustainability. As they seek to maximize return on ESG investments and fulfill the potential of ESG companies, they are increasingly more likely to enact their own sets of metrics and measurement that sync claims with performance.

Environmental Factors Loom Large

For impact investors, environmental, social and governance factors are all important aspects of ESG – but in our survey, it was environmental that carried the most weight. LPs and GPs ranked carbon emissions as the top ESG metric, followed by energy efficiency improvements, and water usage. Additionally, net-zero/carbon emissions was named the top ESG issue LPs and GPs are prioritizing over the next 12 months.

The likely reasons are multi-fold. Environmental issues have gained significant public attention in recent years amid global conversations about climate change, pollution, and resource depletion – and there is a growing awareness of the financial implications. Climate issues can disrupt supply chains, increase insurance costs, and create resource scarcity, and pollution can lead to stiff regulatory fines. And, as investors struggle with ESG standards, environmental factors like carbon emissions and water usage are easier to measure and quantify.

Investors are Unsure How to Approach DEI

When it came to DEI, a subset of ESG, investors seemed unsure of how to align their priorities with action. Survey participants ranked DEI as the second highest ESG-related issue they are currently prioritizing, but the majority (68%) indicated they aren’t allocating funds to address it. One in three (29%) said they see value in doing so, but have put off action until further into 2024 or when budget for DEI initiatives becomes available.

Funding For DEI Lags Behind Prioritization

Though its funding lags other ESG issues, there appears to be – in word at least – a real growing interest in DEI. As we result, we may see more demand for data and analytics that can track DEI metrics and quantify the positive impact of investments. DEI issues such as workforce diversity, pay equity, and supplier diversity are long-term initiatives that will require patience, persistence, and more clear evidence of value creation.

Uncover New Findings in ESG and DEI Investing Trends

The full Frontline Insight Report of Dynamo’s first ESG and DEI survey provides a detailed look into impact investing trends. It is available to download now.

An Inside Look at ESG and DEI Trends for 2024 from Leading Limited & General Partners

 

 

Donna Parent is the Chief Marketing Officer (CMO) at Dynamo Software. Donna is responsible for the corporate brand, demand generation strategies, and go-to-market initiatives for promoting Dynamo’s end-to-end cloud-based platform to the alternatives ecosystem. She is focused on fueling lifelong relationships with consumers, businesses, and strategic partners. Connect with Donna on LinkedIn.