Covid-19 downturn will not stop ESG’s momentum, says Man Group

Deforestation

The trend towards responsible investing and ESG is likely to maintain its momentum despite the potentially far-reaching impact of the coronavirus crisis, according to new research by Man Group.

With climate change among the top policy challenges globally, ESG (environmental, social and governance) investment themes have become key components among some of the most successful hedge funds in recent years, with Sir Chris Hohn’s TCI Fund, Caxton Associates, JP Morgan, and Man Group emerging as major advocates.

Man, the London-headquartered, publicly-listed global hedge fund group, suggested in a research note on Wednesday that structural drivers favour the trend’s momentum over the longer-term.

Man Numeric, the firm’s US quantitative investing unit, has developed a set of ESG alpha signals using a range of data providers, which indicated responsible investing factors have helped bolster risk-adjusted returns in recent years.

The research, co-authored by Teun Draaisma and Ben Funnell, joint lead portfolio manager within Man Group’s multi-asset group, and analyst Henry Neville, observed how the investment landscape today is markedly different from 2008, when investors put climate change concerns on the backburner following the financial crisis.

“Some of the driving forces behind responsible investing are very much long-term structural drivers, not short-term cyclical drivers,” they noted in the paper.

“These include, but are not limited to: diversity and inclusion to achieve better decisions; climate change as a large existential threat that needs to be addressed; and governance structures to ensure incentives are aligned with all stakeholders.”

Elsewhere, some observers have suggested the ESG drive ignores investment fundamentals, risking bubbles similar to the tech boom of the late 1990s.

But Man’s commentary observed how stocks traded by ESG funds are not priced at a premium compared to non-ESG stocks, while inflows into ESG funds amount to some USD20 billion, a comparatively small number.

“There is a good chance, in our view, that this theme is one of the dominant factors of the coming decade, at the end of which it may well have taken bubble-like proportions. However, for now, a bubble cannot be detected.”

ESG factors and themes have become central to hedge funds’ investment considerations and operational processes in recent years.

A wide-ranging industry report by KPMG, the Alternative Investment Management Association (AIMA), the Chartered Alternative Investment Analyst Association (CAIA), and CREATE-Research, published earlier this year, indicated growing numbers of investors are now demanding that hedge funds build ESG elements into their investment processes.

Deutsche Bank’s annual Alternative Investment Survey - which takes the temperature of hedge fund investor sentiment globally – found that ESG factors shape the allocation decisions of almost two-thirds (60 per cent) of investors.

Of that number, almost a fifth (18 per cent) of respondents invested with managers as a result of ESG factors, according to the survey, published last month.

“We don’t feel that there is a bubble in RI, and don’t expect retrenchment from the ESG leaders compared to the broader market,” Man’s study observed. “RI has moved on since 2008 – and so should our views.”