Alternatives managers split on the benefits of ESG, finds Unigestion

Hedge fund and private equity managers are split on whether considering environmental, social and governance (ESG) is beneficial to their businesses, according to a survey by boutique asset manager Unigestion.

The survey suggests ESG is growing in importance for hedge funds with 53 per cent of managers saying they currently have ‘no interest’ compared with 60 per cent who 12 months ago said they were ‘reluctant’ to consider ESG as part of their strategies. In addition, some 30 per cent of hedge fund managers surveyed are now actively incorporating ESG into their strategies.
 
Whilst there were a number of strategies represented in this sample, the clear leaders in ESG adoption were arbitrage managers – 67 per cent of which had an active ESG strategy. Tactical traders meanwhile, (including commodities, managed futures and global macro strategies) find it the most difficult to implement ESG into their investment processes because of the nature of the strategy.
 
One of the managers surveyed, Winton Capital, explained that its approach to ESG encompasses broad initiatives such as sponsoring research prizes. In addition, its headquarters are a certified Low Carbon Workplace, one of only eight in the UK.
 
Small and large firms also diverged in their approach to ESG. Whilst the survey showed that large firms are more likely to have in place a formal ESG policy than smaller firms, there are again exceptions. Arrowgrass Capital Partners has USD 5.9 billion under management and has a strong ESG policy having partnered with an ESG data provider and a responsible investment consultant, and having its CEO and other members of the senior executive sitting on its ESG committee.
 
The survey also showed more hedge funds are becoming signatories to the PRI. Last year only 13 per cent of hedge funds surveyed were signed up to the principles, whilst this year 20 per cent had signed up. As the practicalities of incorporating ESG into investment strategies is still a stumbling block for many managers, the PRI is spearheading a working group to create a standard ESG due diligence questionnaire for hedge funds.
 
Private equity managers are on the whole more advanced than their hedge fund counterparts in ESG adoption, and Unigestion has also seen a larger year on year improvement in this asset class. This year, 42 per cent of private equity managers achieved ‘advanced’ or ‘leader’ status (up from 29 per cent last year) and the proportion of ‘reluctant’ managers fell from 27 per cent to 21 per cent. 
 
The survey shows variation between private equity managers linked primarily to size, geography and nature of the strategy – with 95 per cent of large firms showing interest in ESG compared to only 63 per cent of small firms (figure 4), and almost double the number of European managers than US managers showing interest at 94 per cent vs 52 per cent respectively.
 
The clear private equity ESG leaders are buyout managers, with 45 per cent of managers scoring ‘leader’ or ‘advanced’ status, another 29 per cent with ESG policies in progress, and only 10 per cent of managers showing reluctance.
 
By comparison, 46 per cent of venture capital managers are reluctant to introduce ESG policies (figure 7), though this is still a significant improvement on last year (60 per cent reluctant).
 
Special opportunities managers also showed strong results, with 53 per cent of managers in the ‘leaders’ or ‘advanced’ category, though 31 per cent are still reluctant.
 
Eric Cockshutt, (pictured) responsible investment coordinator at Unigestion, says: “We are still seeing too many hedge fund and private equity managers dismissing ESG as a cost burden, incompatible with their strategies, or a mere marketing exercise. The experience of many managers however is that ESG adoption is both feasible and beneficial to clients and the company’s overall reputation for taking seriously its environmental and social responsibilities.
 
“We hope that our work with bodies such as the PRI and with managers who are practicing strong ESG policies acts as an example and makes it easier for more firms to realise that ESG has serious long-term importance and implications.” 

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