Report shows investors are demanding that hedge funds incorporate ESG factors
Progress is being made in transitioning investments to long-term stability but there is more to be done according to a new report.
And investors are not simply virtue signalling, they see ESG investing as serving their own interests as much as those of wider society.
That means that asset managers now face a dual demand from investors: to deliver attractive financial returns while considering ESG risks in their investments.
The report from KPMG International, the Alternative Investment Management Association (AIMA), Chartered Alternative Investment Analyst Association (CAIA) and CREATE-Research, says that institutional investors are demanding that hedge fund managers incorporate environmental, social, and governance (ESG) factors into their investment activities.
"Thus, the traditional risk-return equation is being rewritten to include ESG factors," said Anthony Cowell, Head of Asset Management, KPMG in the Cayman Islands and co-author of the report. "In the hedge fund industry, ESG has gone from being a nice-to-have to a must-have."
Mindset shift
While the hedge fund industry is responding to the ESG demands of investors, there is some way to go.
While 45% of institutional investors now base their investments in ESG hedge funds, only 15% of the surveyed hedge fund managers define themselves at the 'mature' stage, where ESG is implemented across the firm via appropriate policies, committees, research and data.
A further 44% are at the 'in progress' stage, while 31% are still at 'awareness raising' stage, while 10% have 'no implementation to date'.
"Sustainability is set to reshape the ecosystem of capital markets and the behaviours of their participants. It requires mindset shifts from the way investing has been done historically," said Andrew Weir, KPMG Global Head of Asset Management, KPMG International, and a partner with KPMG China. "It will become the gold standard in investing."
Fund strategies
The report shows that 52% of hedge fund managers have incorporated ESG factors into investment process, 50% exclude securities that sit uncomfortably with the personal values of investors, and 31% incorporate shareholder engagement.
"Creating the necessary infrastructure of data, skills and technology is proving challenging," added Amin Rajan, CEO, CREATE-Research and the report's co-author. "Progress may not be enough, but it remains exponential. Investors and their managers are having to climb a steep learning curve via learning-by-doing."
