Executive summary

Sustainability adoption in the private markets has surged over the past four years, driven by a demand-side push and regulatory pressure. The share of sustainable investing has increased 2-3x, representing ~20% of the aggregate capital raised . Yet, alternative investments remain underpenetrated in terms of integration of sustainable factors. 

Amid the ongoing regulatory changes in the US and Europe, the next phase of sustainability integration is expected to be driven by long-term value creation. As the climate financing gap continues to widen, the world is witnessing  climate-related disasters at an accelerated rate. While in the short term, asset managers may focus on adapting to the changing policy landscape, in the long term, their sustainability strategies would continue to be based on materiality, better risk management and enhanced value. While regulations evolve, product innovation and effective implementation are expected to be the key sustainability strategy for managers in the medium to long term. 

In this milieu, challenges abound for alternative/private managers as they look to institutionalize and formalize their operating models. Take data, for instance. Managers need to navigate the data gap given that reporting by portfolio companies is inconsistent and disclosures are backward-looking. Furthermore, managers must adopt a future-ready approach that accommodates evolving regulations and aligns with diverse limited partner (LP) mandates. 

The next leg of sustainable investment in private markets requires managers to strengthen their integration strategy across the three key pillars of data, frameworks and value creation. While there is no one-size-fits-all approach, our recommendations are drawn from the best practices from our ongoing engagements and conversations with a diverse range of alternative managers.