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Pension funds lead on ESG

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About a third of hedge funds invest in ESG-dedicated strategies leading to investment demand being considered a ‘primary driver’ in improving ESG, research from BNP Paribas shows. One-fifth of investors plan to increase this in 2022 and a further 23 per cent are considering an investment.

Pensions remain the leaders in this space, with analysis showing how 25 per cent of public pension funds invested in ESG hedge funds along with 22 per cent of corporate pension funds.

Societal trends, greater awareness regarding the environment and equality, and efforts from governments have all pushed institutional investors in particular to want to become more responsible with their allocations.

Despite this, data from Eurekahedge in 2021 showed there were still only 65 live ESG hedge funds: approximately just 3 per cent of all hedge funds in the industry.

Though this isn’t a positive indicator, firms are increasingly seeing efforts from hedge funds across both Europe and the US.

Tom Wrobel, Société Générale’s director of capital consulting and capital introduction, explains that the first signs of movement in ESG came from European hedge funds, with the US now looking to catch up and fulfill investor demands.

“At the top level, it’s something hedge funds have realised they can’t ignore. There’s been some more proactive engagement and now most are open to at least discussing ESG conditions within a portfolio. Some have even built customised mandates for investors, such as Bridgewater who recently launched a Sustainable Investing & ESG Policy,” he comments.

Jamie Kramer, head of the alternatives solutions group at JP Morgan Asset Management echoes this, stating that there are only two out of the 100 hedge funds the firm works with who haven’t yet drafted an ESG policy.


“In the US, DE&I and climate change have been the two most important issues around ESG; investors and allocators who care about ESG are very focused on these two topics,” observes Julliette Menga, chair of the ESG committee at Aetos Alternatives Management.

Research from Bloomberg tracked its transcripts between Q3 2015 and Q4 2020 and saw a sharp uptick in mentions of ‘ESG’ from Q1 2020 to Q4 2020, where mentions increased by approximately 12,000.

“I’ve worked in the hedge fund space for two decades and since 2020, it’s clear that the trend with these two core issues has been steadily upwards; everything just accelerated very significantly in 2020 and I don’t think the momentum will slow down anytime soon,” Menga adds.

Mercer principal Robert Howie echoes this, stating: “The pace of change has been phenomenal; it’s being driven by investors who want accurate ESG reports and for hedge funds to be responsible with their investments.”

While trading and arbitrage strategies in the hedge fund space still lag behind, long/short and credit strategies are experiencing lots of movement and progress on the ESG front.

“Private credit, and credit more generally, within hedge funds is also seeing greater growth in the adoption of ESG-focused investments,” says Kramer.

Menga adds: “For long/short and credit-type managers, there’s been a lot of movement there with ESG. However, arbitrage and trading strategies still haven’t figured out how to think about and incorporate ESG.”

“When you’re running an equity strategy, such as equity long/short driven strategies, it’s easier to fulfil ESG demand by either filtering out any negatively perceived ESG stocks from your investment universe, or by being proactive and looking for impact ESG investments,” Wrobel notes.

Other ESG trends in hedge funds include the energy transition and carbon allowances, with regulators giving indications of support for both of these, according to Wrobel.

ESG has taken the industry by storm in the past five years, but do the promising figures necessarily mean real change?

Many advisers remain optimistic for this pace of momentum and change in attitude, but not all.

One adviser believes that the big multi-manager, privately-owned hedge funds won’t be in any rush to implement ESG metrics, even if investors call for it.

Mercer’s Howie thinks that, while ESG is important to certain hedge funds, the quality of the returns and how a portfolio is managed remain more important.

Public pensions have been putting pressure on their managers, along with some of the bigger institutions who have the resource and capacity to have a real impact and instigate change.

Menga suggests that the pressure comes from the fact that they are government funded pensions and adds private and corporate pensions are much less likely to care about ESG considerations.

For now, actionable steps, including net zero and DE&I goals, have been put in place – the question is whether they will transpire in the future.

One motivation could be the data which shows that ESG can be used to create better returns.

“It’s potentially a source of enhancing returns. We’ve seen many hedge funds that not only use ESG as a risk-management tool, but also as something you actively use to deliver returns for investors,” says Howie.

ESG roles

One noticeable change which has taken place is the creation of ESG-related roles within firms.

Research from AIMA in 2020 found that half of EMEA-based hedge funds have one member of staff in an ESG-dedicated role to promote sustainable investment, with the US lagging on this front with only 15 per cent of firms doing so.

However, while this is a positive change within the industry, a recent study by employment data platform, HFObserver found that over half of new hedge fund ESG jobs have been filled by women in the past two years.

With an industry such as the hedge fund space which has been criticised so heavily with diversity, these statistics, compared with the 29 per cent of hedge fund appointments women account for across the industry, are not impressive.

Reflecting on this, Black Hedge Fund Professionals Network founder Andra Ofosu notes: “Let’s start with the positive: whenever new seats are created in the industry or open-up, that’s a positive. The ability to broaden the scope of who can participate in the space is always positive.  

  “Having said that, we need to watch out for clustering of certain groups – by gender, by ethnicity – into certain roles. We need to be careful of any underlying or inherent biases that might promote or encourage that kind of clustering. Whether it’s women in ESG roles, or looking across our membership, people of colour in the hedge fund industry clustering in middle or back-office roles.”

What next?

The future of ESG in hedge funds points in only one direction: growth.

“I suspect we’ll see a divergence of hedge funds that want to engage and receive capital from more institutional sources and therefore ESG will have to be ingrained throughout their business and investment process on all elements of ESG,” says Wrobel.

“However, for players who source more niche sources of capital and don’t rely on public capital so much, I believe ESG may remain something that they don’t take much interest in, and the same could be said across the investor universe. I think we’re going to see a split,” he adds.

With pension funds trailblazing in ESG, long/short equity and credit strategies are proving the most progressive with regards to these considerations, with investors increasingly demanding transparency metrics on ESG from hedge funds.

Read the full Hedge Funds & ESG: Navigating internal change and responsible investing Insight Report here.

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