More Capital Invested in Social and Eco-Conscious PE Funds

More private equity and venture capital funds are incorporating environmental or social criteria in their portfolios, according to a new report from a US SIF, an association for sustainability-minded investors.

As of the beginning of the year, the report estimates that $80.9 billion was invested in 375 alternative investment funds incorporating environmental, social and governance (ESG) criteria, up nearly 16% from the same period a year ago. Funds tracked span the asset classes of private equity and venture capital, real estate, and hedge funds.

Private equity and venture capital funds led the field of ESG alternative investment vehicles numerically with 233 distinct funds in 2011, or 62% of total funds tracked. In asset-weighted terms, however, private equity and venture funds were the second largest of the three types of investment vehicles studied, with $33.9 billion, or 42% of the ESG alternative investment market. Property and real estate funds managed the largest sum, with $44.3 billion, or 54% of ESG-focused assets tracked.

It’s unclear to what extent the growth in capital represents of shift of dollars to newer ESG-mined funds, or simply a trend among existing funds to adopt some social and environmental criteria. As it stands, the definition of a ESG-minded is somewhat squishy. In order to be counted, funds had to incorporate some form of  ESG criteria in an explicit way. However, the way fund managers choose to do so remains highly variable.

Some funds describe their approach using terms such as sustainable investing, responsible investing, impact investing, double-bottom-line, triple bottom-line investing, green investing, socially responsible investing, or mission investing. Others sign on as supporters of guidelines set by humanitarian or environmental organizations. For instance, KKR is a signatory of the UN-backed Principles for Responsible Investment.

Among venture and private equity funds, environmental considerations, such as support for alternative energy, pollution mitigation, and energy efficiency, ranked as the largest area of emphasis, according to the report. US SIF estimates that environmental factors affected nearly $26.2 billion in private equity capital, up from $23.1 billion in 2010. To some extent, researchers said, limited partners are driving the increase in funding, through initiatives such as CalPERS $600 million Alternative Investment Management Environmental Technology Program and increased interest among foundations and family offices in investments that align with their philanthropic goals.

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