Asset owners and fund managers alike are reporting increased focus on ESG considerations
In its most recent global survey of hedge funds, the Alternative Investment Management Association (AIMA) found that managers are increasingly pursuing investment opportunities that are customised to particular clients’ needs. A significant part of this has been driven by a desire to better align with their clients’ interests — and that includes responsible investment.
“Nearly two thirds of all respondents have seen increased interest in their firm’s responsible investment capabilities over the past 12 months,” the AIMA said in its report titled In Harmony. “This is representative of the strong sentiment we see across the broader hedge fund industry, where ESG and RI is fast becoming one of its most significant considerations.”
Another report from Cerulli Associates echoes that finding. Drawing from two surveys it conducted early this year with the UN-supported Principles for Responsible Investment, the firm looked at how the hedge fund industry is currently positioned in terms of ESG.
One survey, focused on asset owners, found that some key drivers of responsible investment in hedge funds included demand from beneficiaries (42%), external pressure (42%), international initiatives (21%), and pressure from the board (17%). The other survey, which polled fund managers, uncovered other drivers like growing client demand (27%), aligning investment objectives with client values (18%), mitigating risk (12%), and belief in the merits of ESG factors in the investment process (12%).
“The asset owners we surveyed emphasize the importance of including ESG considerations in investment management agreements,” Cerulli reported. “They also want to see increasing use of technologies such as artificial intelligence (AI) and machine learning to improve the gathering, granularity, and frequency of ESG data.”
While a focus on extra-financial returns is still rare among hedge-fund investors, many are still interested in limiting the negative impact of their investments. However, nearly three quarters (74%) of the respondents to the asset-owner survey are still unsure whether ESG factors positively affect investment returns. That uncertainty was even more pronounced among hedge fund managers, with 83% saying they were not sure.
Cerulli also looked at how communication regarding ESG considerations was happening at hedge funds. More than half of managers (54%) said they provide such information on an ad hoc basis; with regards to format, slightly less than half (46%) said they provide written reports, while around one third (34%) provide side letters or emails. Their responses indicated an equal focus on environmental (63%) and social concerns (63%), and slightly greater emphasis on governance (74%).
But investors are becoming more demanding. An equal proportion of asset owners said they wanted quarterly (40%) or annual (40%) communications on ESG concerns. Nearly three fourths (74%) wanted written reports; there was near-absolute demand for communications on environmental (96%) and social concerns (96%), and all responding asset owners (100%) expressed a desire for communication on governance.
“Although communication between asset managers, businesses, and wider society is not easy, it will be central to the rise of RI,” Cerulli said. “ncorporating ESG factors into hedge fund strategies will be a long-term journey for all concerned, but the financial and nonfinancial returns will be worth the effort.”