As we enter into a new year, the world still faces unprecedented global warming and challenges concerning social equality, and corporate transparency. Implementing sustainable investment strategies is an increasingly popular way of mitigating these issues.
Pitchbook’s comprehensive study that was released in the last quarter offers a lot of insight into sustainable investing, its challenges, and its benefits.
The report is based on the experiences of hundreds of LPs, GPs, and service providers that contributed information on their sustainable investment practices and their experiences.
What is sustainable investing?
Sustainable investing, also known as socially responsible or impact investing, refers to investing in financial opportunities that align with the investors’ values and that aim to generate both financial returns and social and environmental impact. Sustainable investing offers a positive balance between traditional investing and social or environmental considerations.
Sustainable investing at times means investments in sustainability-focused companies and technologies like renewable energy or sustainable agriculture, but not exclusively. Sustainable investing primarily refers to strategically prioritizing funds and companies with robust policies for improving their ESG issues.
PitchBook completed an extensive sustainable investing survey to discern what matters most to investors. The survey sheds light on some of the motivations behind sustainable investing, the opportunities, and the challenges. After surveying over 500 LPs, GPs, and service providers about their sustainable investing, It’s easy to see from the data that Investors worldwide are recognizing the value of sustainability.
PitchBook’s sustainable investment survey
The 2022 PitchBook Sustainable Investment Survey has the most balanced profile to be surveyed to date. It comprises data from 552 respondents globally, including LPs, GPs, and Other investor types such as corporate VCs, M&A advisory, investment banks, hedge funds, and consulting backgrounds.
Overall, the survey notes a distinct difference in sustainable investing practices between North American and European respondents. Here are three notable differences.
- 35% of North American participants with a sustainable investment strategy started it more than five years ago. For European respondents, that statistic was 23%. But when considering data from the past 2–5 years, 30% of European investors began sustainable investment initiatives, while their North American counterparts did so at a rate of 25%.
- 73% of European asset managers use an ESG risk factor framework when deciding whether to invest in a company. The rate for North American investors is 56%.
- Of the European asset managers who consult with an ESG risk factor framework, 66% request portfolio companies to relay financially significant ESG risk factors, with their North American counterparts doing so at a rate of 42%.
Measuring the success of sustainability initiatives
A key takeaway of PitchBook’s survey is the importance of gauging the benefits of sustainability strategies.
Statistics on the success of sustainability methods provide investors with figures on financial returns and performance across environmental, social, and governance areas. That way, investors can make data-driven decisions when choosing what to invest in. To optimize future initiatives, they can also focus on areas that need improvement — whether related to ESG issues or financial efficiency.
In the survey, many investors expressed concerns about accurately measuring their strategy’s success.
One exception was climate-change-focused initiatives. Investing in forests and oceans has gained mainstream popularity, making data on environmentally-focused sustainable investing more accessible.
These easily accessible statistics made the E in ESG most popular among investors. Participants prioritized social and governance issues at about the same (low) rate. This shows a need for a better understanding of ESG frameworks, which view environmental, social, and governance matters as inextricably linked.
What VCs think
A central part of PitchBook’s survey outlined venture capitalist (VC) trends and concerns. The survey gathered responses from 134 VCs, comparing their perspectives to general partners (GPs).
Key findings
A high 78% of VC participants had portfolios that partly or entirely implemented sustainability practices, compared to 72% for GPs.
When deciding whether to design a sustainable investment program, VCs again came out ahead of GPs, at 46% to 42% in favor. This may be because of the increased concern among VCs for social issues like corporate equality and diversity considerations.
Both VCs and GPs prioritized environmental compliance and impact over social and governance issues. VCs focused on climate change concerns even more than their GP counterparts, surveying 46% to 35%.
Perceived challenges
While sustainable investing has worthy aims, it faces many perceived challenges from VCs. VC investors often deal with precarious companies, including startups with to-be-produced products, giving rise to understandable worries. Here are three concerns outlined by the survey results.
- Difficulty benchmarking non-financial goals. Sustainable investment becomes complex without a standard way of setting and measuring non-financial targets. The confusion partly stems from the need for a common framework.
- Negative impact on returns. Despite sustainable investing’s aim of lowering risk and improving long-term financial performance, it’s still perceived as harming returns. Investor education remains a significant impediment.
- Unclear how to measure and define impact outcomes. This concern was noted by 42% of VC respondents, making it their foremost sustainable investment worry. Investors require a clear, understandable way of measuring outcomes before they’ll feel confident in sustainability-focused strategies.
The IRIS+ framework and impact investing
A more general data point of PitchBook’s survey was gleaning what investors seek regarding impact. Applying the IRIS+ framework from the Global Impact Investing Network (GIIN), they asked participants to rank 17 categories in terms of importance. IRIS+ is a standard method for analyzing, regulating, and enhancing overall investment impact.
Among all respondents, energy and climate impact goals — like investing in renewable energy or in companies working to reduce carbon emissions — were the most popular, sitting at a rate of 46% and 44%, respectively. This is likely because it’s perceived that these issues require more immediate attention and have a higher chance of profitability.
A rapidly-changing sustainable investment landscape
With the sustainable investment landscape in constant flux, survey participants reported consulting with investment industry publications, newsletters, and podcasts to stay up to date.
Respondents regularly brought up the lack of convergence on an external, standard framework to measure impact, with only 11% of LPs and 16% of GPs involved in impact investing using one. The same holds true for ESG, with only 23% of GPs using a standardized framework.
The key takeaway
Sustainable investing seeks to assess risk, improve returns, and better the planet. Yet, it remains a complex and confusing topic for many investors. Central to that is the absence of a standard framework to measure impact, performance, and future outcomes.
As various investors increase their understanding of sustainable investing — like focusing on material non-financial risks that lessen long-term profitability and investing in companies that positively impact the planet — they can take advantage of all it offers. PitchBook’s comprehensive data denotes areas for increased awareness to make sustainable investing commonplace.
