BNP Paribas taps into ESG surge with new global sustainability-focused hedge fund launch

Wind power from above

BNP Paribas Asset Management has launched a long/short global equity hedge fund which will invest in companies grappling with looming environmental challenges, as interest in ESG (environmental, social and governance) themed hedge fund strategies continues to soar.

BNP’s new Environmental Absolute Return Thematic (EARTH) Fund will trade energy, materials, agriculture and industrials stocks in both developed and emerging markets with market caps of more than USD1 billion.

It will take long punts in innovative companies that are addressing an assortment of environmental challenges – such as carbon emissions, waste production, and food, water and energy concerns - and pair them with short bets on unsustainable firms, or those names whose business models are vulnerable to transition risk. 

Short positions are used both to hedge long positions as well as an alpha source in the portfolio, and which have a positive impact by increasing the cost of capital for companies failing to address environmental challenges.

“Companies positioned to help address the significant environmental challenges we face will outperform those that either take no action or indeed contribute to these issues,” said Edward Lees, joint portfolio manager of the fund.  “The latter will increasingly be at risk of having stranded assets and will be forced to take write-downs.”

Stock selection is built around thematic, relative value, or catalyst-driven trade ideas generated from a proprietary database, with potential positions mapped and measured using eight sustainable development goals (SDGs).

The UCITS compliant fund combines thematic, top-down macro, industry and regulatory research with fundamental company analysis, underpinned by proprietary quantitative models for portfolio construction, risk management and alpha screening.

The new fund launch comes as concerns around climate change and sustainability have led to a boom in interest in ESG factors and sustainability themes across the manager and investor communities.

High profile hedge fund firms including Sir Chris Hohn’s TCI Fund, Caxton Associates, JP Morgan, and Man Group have emerged as leading advocates over the past 18 months.

Meanwhile, a wide-ranging study by Deutsche Bank earlier this year found that ESG factors now shape the allocation decisions of roughly two-thirds of hedge fund investors.

Ulrik Fugmann, joint portfolio manager of BNP’s new fund, said: “EARTH offers our investors access to the sustainable investment theme within an innovative long/short framework, enabling them to benefit from positive change in both high and low carbon intensive sectors, with the aim of delivering long-term absolute returns while reducing risk during periods of market drawdown.”

Lees added: “As population growth boosts demand for food, water and energy, causing increasing CO₂ emissions, waste production and unsustainable consumption, the market for solutions to meet these needs could amount to trillions of dollars and will be increasingly encouraged by governments.”