Private markets offer new opportunities for responsible investors

Responsible investment principles are becoming increasingly important in private markets as investors seek to balance financial returns with environmental and social outcomes, according to new research highlighting the growing role of ESG considerations across alternative assets.

The report by RIAA notes private markets, spanning private equity, private credit, real estate and infrastructure are attracting greater attention from investors. This is due to their potential to deliver diversification, differentiated returns and access to opportunities not available through public markets.

While responsible investment (RI) approaches such as ESG integration, stewardship, thematic investing and impact investing are common in listed markets, the report argues private markets offer unique advantages because investors often have greater influence over assts and management decisions.

"One of the most effective ways of implementing RI in private markets is through engagement," the report said.

Unlike public market investors, private markets managers frequently hold direct operational control or significant influence over assets, enabling them to implement sustainability initiatives more directly and create long-term value.

The report highlighted RI could help private market investors manage climate, governance and social risks while identifying new growth opportunities, improving operational efficiency and strengthening business resilience.

It also warned that ESG risks can be magnified in private markets due to the long-term and illiquid nature of many assets.

"As critical assets for companies or essential infrastructure for society, their physical nature means they are often carbon-intensive and exposed to both physical and transition risks over long time horizons," the report said.

Several case studies were cited as examples of RI in action.

These included Australian Ethical investment's Growth Opportunities Fund, which had secured more than $700 million in commitments and invests in themes such as decarbonisation, digitalisation and demographic change. Early investments include electric bus infrastructure in India and innovative ages care developments in Australia.

The report also highlighted Kilter Rural's Murray Darling Basin Balanced Water Fund, which combines commercial water investments with environmental restoration projects, and Nuveen's Nature Positive Farming Initiative which links farmland productivity with biodiversity, water management and emissions reductions outcomes.

RIAA's latest fact sheet notes while the principals underpinning responsible investment are broadly consistent across public and private markets, private assets offer investors additional tools to drive measurable environmental, social and financial outcomes through long term stewardship and active ownership.