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Aug 08, 2019

Hedge funds to increase the amount they invest based on ESG criteria

Fifty-eight percent of hedge fund assets will be tied to ESG factors in 2020, says BarclayHedge

Hedge funds expect to increase the amount they invest based on ESG factors next year, according to a survey by Iowa-based BarclayHedge. 

Fifty-eight percent of hedge fund assets will be tied to ESG criteria in 2020, an incremental rise from 42 percent last year and the current 52 percent, BarclayHedge finds in a survey of global hedge fund managers and commodity trading advisors.

‘The increasing role of ESG ratings among the survey participants isn’t surprising,’ observes Sol Waksman, president of BarclayHedge, in a statement. ‘Several factors are converging that are driving the trend. One is an increased interest among managers in social impact investing.

‘There’s also a growing recognition of the link between governance and performance. Finally, the growing awareness of how human activity causes climate change has led investors to place greater importance on trying to reduce the impacts of the most egregious activities.’

Governance was indeed cited as by far the most important ESG factor, weighed for short bets as well as long positions, emphasizing the link between governance and company performance cited by Waksman.

The emphasis on social factors is greater in considering long candidates than short candidates, however. On this, the report notes: ‘The larger emphasis on the ‘S’ in ESG for long candidates may well reflect growing investor recognition of the value of intangible assets like brand or customer loyalty – and how easily the value of those assets can be eroded through reputation-damaging human capital or supply chain events or other negative social factors.’

On average, investors considering ESG factors in making equity investment decisions have been doing so for nearly five years, the survey finds.

When it came to a preference for sources of ESG ratings and scores, Bloomberg and Sustainanalytics led the way, each favored by one third of those surveyed, with MSCI selected by 20.8 percent and Thomson Reuters by 12.5 percent.