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In total, 22 key findings from the survey results are featured in the latest Dynamo Frontline Insight Report, "An Inside Look at ESG and DEI Trends for 2024 from Leading Limited & General Partners."

Majority of GPs & LPs Say ESG Ratings are an Important Factor in Investment Decisions

When asked how important ESG ratings are to making investment decisions, a significant segment (45%) of respondents said they were either "very important" or "extremely important / essential." Another 37% indicated that the ratings are "somewhat important." Only 18% selected "not important."

"At first glance, the responses seem straightforward," said Danielle Pepin, head of product, portfolio monitoring and valuation, ESG and mobile at Dynamo. "However, they start to get convoluted when looking at how respondents feel about ESG performance."

GPs and LPs Divided on ESG Performance, Cite Lack of Industry Standards as Top Challenge

Lipper, a financial data provider, recently provided CNN with data about ESG investing. According to the Lipper stats, U.S. assets under management in ESG funds declined from $339 billion in Q2 2023 to $315 billion by the end of September 2023. In Dynamo's survey, participants showed some reticence around ESG investment performance. Respondents were evenly split on believing ESG-focused investments perform better (45%) and perform the same (44%) as non-ESG investments. Eleven percent (11%) said they perform worse.

The division on performance may be due to the absence of accepted methods and metrics for performance evaluation. Indeed, both LPs and GPs reported that the top challenge of incorporating ESG factors into their investment decisions is the lack of industry-wide standards. A significant segment (38%) utilize manual technology, such as spreadsheets, for measuring ESG performance, which can deplete human capital collecting, managing, and sorting through data.

Some frameworks that are gaining traction are SASB, GRI, TCFD, and the closely-related SFDR, WDI, but it is still early. "Manual tracking can definitely undermine confidence in the validity and comprehensiveness of reporting," said Dynamo CEO Hank Boughner. "LPs and GPs know this all too well. It's why we at Dynamo continue to see our clients embracing the removal of manual tasks. Evolving resource-heavy processes continues to be underscored in our research reports as a top strategic imperative."

Both Greenwashing and AI Noted as Challenges within Responsible Investing

With the lack of industry standards continuing to be a pain point, it's not surprising that more than six in 10 survey respondents are concerned about greenwashing as it pertains to current investments. Nearly five in 10 are concerned enough to be doing something about it, namely regularly monitoring for signs of the deceptive tactic.

Monitoring and reporting on responsible investing may soon become easier with coalitions like CFA Institute, Global Sustainable Investment Alliance (GSIA), and Principles for Responsible Investment (PRI). They jointly developed a new resource to define five common terms used in responsible investing - all in the hopes of combatting greenwashing.

Artificial intelligence (AI) was also noted by the surveyed LPs and GPs as being the most difficult sector to evaluate for ESG when making investment decisions. AI, in general, is evolving fast in the ESG space. So much so that research by PwC UK supports that using AI for environmental applications could contribute up to US$5.2 trillion to the global economy in 2030. "AI could be a saving grace for ESG as it can help to simplify reporting, create data models and apply analytics, and even help align ESG data with the latest standards and frameworks," explained Pepin.

Environmental Factors Carry Most Weight in ESG Decisions

When it comes to the ESG metrics respondents use to measure the performance of their portfolio companies, environmental factors appear to carry more weight than social and governance. LPs and GPs ranked carbon emissions as the top ESG metric, followed by energy efficiency improvements, and water usage. Additionally, net-zero/carbon emissions was named the top ESG issue LPs and GPs are prioritizing over the next 12 months.

When asked about their own firm's ESG performance, environmental factors still topped the list. Respondents ranked climate change/carbon emissions as number one, followed by energy efficiency improvements, and then established business ethics.

DEI Priorities Don't Align with Funding

In examining perceptions and practices related to the ESG subset of DEI, the Dynamo report identified a disconnect between strategic focus and budget. Though survey participants ranked DEI as the second-highest ESG-related issue they are currently prioritizing, the majority (68%) indicated they aren't allocating funds to address it. One in three (29%) said they see value in doing so, but have put off action until further into 2024 or when budget for DEI initiatives becomes available.

"The investment community is still learning what constitutes meaningful DEI policies and practices," said Pepin. "Our survey findings are likely a reflection of the still-nebulous nature of DEI strategy, and how it ties to ROI. Many of these firms may very well be pursuing the acceleration of DEI principles albeit without an earmarked line item in the budget. The same may be true among portfolio companies, making it difficult for LPs and GPs to evaluate the true effectiveness of DEI on performance."

The complete "Dynamo Frontline Insight Report: An Inside Look at ESG and DEI Trends for 2024 from Leading Limited & General Partners" can be accessed on Dynamo's website.

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