5 ESG Trends for 2023 | Allvue Systems

By: Allvue Team

December 1, 2022

The private equity space has been abuzz with ESG over the last few years. According to Allvue’s ESG in Private Equity 2022 survey, GPs have become as bought in on ESG in investing as their LPs are, with both sides eager for further ESG data standardization. Also in 2022, the U.S. Securities and Exchange Commission took long awaited steps to formalize the way investment managers approach it. As we look ahead to 2023, the energy behind this industry force is sure to pick up even more.

Read on for Allvue’s predictions on the top five ESG trends in 2023.

DOWNLOAD: Allvue ESG in Private Equity Data Report

Industrywide ESG action in 2023

Investor demand for ESG-focused private market investments is higher than ever, with a third of LPs planning to have one-fifth or more of their portfolios allocated to ESG investments within two years. And both GPs and LPs agree to the same degree that an ESG focus leads to better returns. With this in mind, both parties are sure to accelerate their ESG plans, from ESG data collecting and benchmarking on the manager side, to stepped-up due diligence reviews and new allocation targets on the investor side.

Growing tree, alongside data showing how GPs and LPs prioritize ESG action.

External ESG pressure on private equity in 2023

Private equity has far-reaching impact across countless industries, and that reach is only growing as the private markets themselves grow with additional investor demand. With that in mind, some of the biggest business names are calling on private equity to lead the charge and standardization of ESG for everyone. As this outlook picks up steam, GPs particularly will feel the public pressure to not only bring an ESG lens to their strategy, but also to take real concrete steps to make responsible investments and create value in their investments accordingly.

Spotlight focusing on ESG and data displaying that 40% of LPs would reject a private capital manager who doesn't meet their ESG standards.

GPs’ ESG progress in 2023

According to Allvue’s survey, mid-size GPs appear to have the most ESG readiness when compared to their smaller and larger peers. They largely agree they’re most prepared compared to other managers to take on ESG initiatives, likely thanks to a just-right combination of resources and flexibility due to size. Throughout 2023, look to the middle of the pack to make the biggest splash on ESG private market action.

Medium dollar sign wearing a crown along side one larger and one smaller dollar sign, sitting above data showing mid-sized GPs' ESG success

ESG data standard in 2023

Both GPs and LPs agree that their greatest ESG challenge by far pertains to wrangling ESG data. While the this complex and largely manual private equity industry has yet to find a ESG data reporting sweet spot, in 2023 and beyond, it will continue to be a core focus.

Three interlocking gears labeled E, S, and G, above data showing LPs and GPs top ESG challenges.

ESG regulatory action in 2023

In 2022, the U.S. SEC proposed its first ESG investment rule, with other proposed rules likely on the horizon. As noted, public attention to ESG in private equity is growing, and manager and investor ESG action is picking up. Both of these factors will ensure that regulatory attention also stays trained on GPs’ ESG action and progress.