The Rise of ESG-Aligned Strategies in Alternative Investment Management: Trends and Implications for the Industry

Alternative investment managers are increasingly focusing on ESG-aligned strategies, according to recent Form D filings. These filings reveal a significant 50% growth in exempt offerings with ESG-aligned themes in 2021, surpassing the 33% growth in total Form D filings. Private fund offerings aligned with the “impact” theme within ESG, such as opportunity zone funds, have been leading the way in sustainability funds, representing 45% in 2018 and maintaining the top spot in 2019 and 2020. However, a new trend emerged in 2021 with climate-focused funds gaining traction, jumping to represent 27% of all ESG-aligned themes, up from just 1% in 2020.

This shift towards climate-focused private funds is consistent across other alternative investment products, with a notable focus on carbon reduction and clean energy transition in recent hedge fund offerings. Alternative investments are showing more ESG specificity compared to ETFs, likely due to the larger portfolios of alternative investors allowing for more targeted approaches. Despite this, both general ESG funds and their more specific counterparts are experiencing strong growth in both ETFs and alternative investments.

Investment management firms like Candriam and T. Rowe Price are integrating ESG research into their investment decision-making processes, making ESG incorporation a standard input rather than a differentiator. Regulators worldwide may follow the EU’s lead in requiring fund categorization to help investors assess the level of ESG incorporation. Developing a sustainability ethos within a firm may help align with regulatory objectives, build credibility with investors, and attract a greater share of ESG-mandated assets under management.

Authenticity and transparency in disclosing ESG objectives can reinforce a firm’s vision, improve talent retention, and drive collaboration across functions. Firms that communicate their vision and tie executive compensation to specific ESG targets are leading the way in integrating sustainability into their operations. As the demand for investment professionals with ESG skills outpaces supply, firms that prioritize sustainability and ESG integration may have a competitive edge in attracting and retaining top talent in the financial services industry.