ESG moves into the mainstream for alternative assets

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This month’s guest blog from William Rudebeck, Founder and CEO of BITE Investments, a fintech platform built to deliver alternative investments and private market strategies to professional investors and wealth managers, looks at the importance of factoring in ESG metrics when investing in alternative assets.

Over the past years, demand for alternative assets has risen at an exponential rate. Investors have become increasingly frustrated with traditional asset classes and have therefore been making larger allocations into alternative asset classes. ESG-related strategies are another highly sought-after investment trend. Today, almost a third of public market capital is committed to ESG and impact investments, and a similar development can be seen starting to take place in the private markets. Investors globally are becoming increasingly convinced that ESG integrated portfolios will generate long-term sustainable alpha, if there is good quality ESG data and analytics.

More appetite for ESG investments

Many thought sustainability was going to take the back seat during the pandemic, but the opposite has turned out to be true. The financial turmoil caused by COVID-19 has made businesses re-evaluate their strategies to help re-shape the global economy and make it more environmentally sustainable. This year’s increased frequency of climate-related disasters such as the Australian wildfires, the Pacific typhoons, and the East Africa floods has also influenced investors’ ESG attitudes and priorities.

European investors are at forefront of ESG adoption. Historically, Europe has spent more time on the environmental issues, whereas the U.S. has focused on the social aspects. An interesting development can now be seen in Asia, where their target allocations to ESG strategies over the past few years has seen a meteoric rise. This very much follows their increased interest and demand for alternative asset investments as well.

Attractive ESG-oriented investing environment

ESG adoption looks set to continue on an upward trajectory for the foreseeable future. According to a study from McKinsey, a focus on sustainability markets and products directly links to higher value creation. Besides top-line growth, better performance in ESG also corresponds with reducing costs, minimizing regulatory and legal interventions and a reduction in downside risk by for example lower loan and credit default swap spreads as well as higher credit ratings. The risk mitigation aspects are growing in importance, especially for institutional investors, and has increased by 15% in 2020 compared to the previous year.

There are compelling tailwinds driving ESG investments, not least for illiquid assets. However, as they have a longer investment horizon, they are therefore arguably more exposed to ESG risks and need to make sure ESG factors are appropriately embedded within alternative assets classes. The famous words from Larry Fink, CEO of BlackRock, “Climate risk is investment risk”, is still very much true. It has become key for institutional investors to implement the ‘UN Principles for Responsible Investment’ (PRI) to incorporate ESG issues into their investment practises.

Having the right data is crucial

Understanding and calculating the risk and return ratio for ESG investments is difficult. In the private market, no two assets are the same and need to be assessed and evaluated individually. However, it is important not to let perfection be the enemy of the good and start reporting on what you can rather than feeling it is too overwhelming. There are ways of getting good quality underlying data allowing investors to make more informed investment decisions, and improving this transparency is more important than ever. It is with this in mind that BITE Investments and Apex Group are partnering to offer more enhanced ESG transparency to the asset and wealth management market.

Poor quality or availability of ESG data and analytics has been rated as one of the biggest barriers to adopting sustainable investing. Many companies have still not entered the digital domain and consume and generate a lot of non-digital information. This is not a viable way of working, and an area that requires further focus. It certainly takes a lot of work to aggregate ESG information and report on investment opportunities, but it is necessary to give investors and the public a clearer picture of how companies are managing. As benefits are quantified, emphasis on ESG will continue to accelerate and thereby help investors and managers integrate a sustainability focus throughout each step of the investment process and portfolio management.

About the author:

William Rudebeck

Will co-founded BITE in 2019 having previously co-founded Venture Capital Partners (which subsequently became VCP Advisors) in 2009. VCP has since become a leading Alternatives Asset Management advisory business, which has successfully advised on fundraisings for alternative investment funds aggregating over $13bn. In 2019, Will stepped down from the day-to-day running of VCP to focus 100% of his time on the build out of BITE. Before founding VCP, Will specialised in investment banking within the financial institutions group (specifically advising alternative asset managers) at HSBC, Grisons Peak and Danske Bank.

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