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Feb 07, 2020

Hedge funds warm to sustainable investment

More than half of hedge fund managers say interest in their ESG capabilities has been ‘significant’ over last year, finds survey

Hedge funds are slowly but steadily adding ESG factors to their investment approach as they come under pressure from institutional clients, according to new research.

In a survey of hedge fund managers, 15 percent say integration at their firm is at a ‘mature’ stage, meaning that ESG is incorporated into policies, committees and research, while 44 percent say implementation is ‘in-progress’. 

A further 31 percent say they are at an ‘awareness-raising’ stage, while just 10 percent say there has been no implementation to date.

The study explores the extent to which hedge funds are responding to the growing interest in sustainable investment. 

It was conducted jointly by KPMG International, CREATE-Research, the Alternative Investment Management Association and the Chartered Alternative Investment Analyst Association.

Broad investor interest in ESG investment continues to surge. Data released this week from Morningstar shows that European investors doubled their inflows to sustainable funds between 2018 and 2019. 

The new study underlines the rising pressure on hedge funds to consider ESG as part of their investment strategies. 

The vast majority of hedge fund respondents (84 percent) say there has been an increase in interest in their firm’s ESG capabilities over the last 12 months, with 58 percent describing the growth as ‘significant’. 

When asked to name the main drivers behind ESG investments, 72 percent of hedge fund managers cite demand from institutional investors and consultants. 

‘These institutional investors — and their consultants — have been vocal in demanding that their portfolios not be exposed to the so-called sin industries like fossil fuels or weapons manufacturing, with a growing number of them also seeking to use their capital to generate positive social and environmental outcomes,’ the report’s authors write. 

The findings also suggest hedge funds are starting to see more opportunities in ESG to bolster returns. Around a third (35 percent) name ‘evidence of the materiality of sustainability issues’ as a driver of investment decisions, while 22 percent reference ‘opportunities to generate alpha’. 

Last year, a debate kicked off over the use of shorting by some hedge funds to bet against companies considered on the wrong side of environmental or ethical issues. 

Although some investors believe short selling is incompatible with a sustainable, long-term investment approach, others see it as a way to put additional pressure on companies to change tack.

The study follows a highly disappointing year for the hedge fund industry, marked by poor market performance, outflows and closures. 

In 2019, broad hedge fund indices returned only around 10 percent, compared to roughly 30 percent for the S&P 500. The number of hedge funds also declined for the fifth year in a row, with 540 closures and just 391 launches.

Hedge fund managers who are strongly supportive of ESG investment reportedly include Christopher Hohn of The Children’s Investment Fund, which last year was one of the world’s best performing hedge funds. 

According to Bloomberg, he is putting pressure on companies to cut greenhouse gas emissions and disclose more information about their carbon use.