Hedge funds, many of which have been slow to adopt environmental and social strategies, are pointing the finger elsewhere. Money managers are faulting inconsistent data and a shortage of expertise, according to a new report.
About 63% of money managers cited a lack of quality and consistent sustainability data as the biggest challenge in making such decisions, according to the report Thursday from an industry consortium. Just 15% of hedge funds have incorporated ESG in their investment strategies.
“Extracting meaningful alpha signals from them remains a herculean task for some managers,” the groups said in the report, referring to potential profits generated in excess of a benchmark index. “The implications are clear: not all hedge fund strategies are created equal from an ESG perspective because not all managers see ESG in the same light.”
More than a third of managers said there was confusion over industry terminology, while a quarter said ESG wasn’t relevant to their fund’s investment strategy, especially for those that rely on holding securities for short periods or in markets like currencies that are traded daily.
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The “materiality of risks with not considering" the strategy is the primary consideration for its implementation, a UBS survey finds.
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The actively managed vehicle will invest in about 100 companies.
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Taking on ESG presents fresh challenges for a $3.1 trillion industry that has grappled with sub-par returns.
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Sustainable investing is one of the fastest-growing areas in money management as pension plans and other large investors plow money into the strategy. About $30.7 trillion was held in sustainable or green investments in 2018, up 34% from 2016, according to the Global Sustainable Investment Alliance.
Hedge fund investors are pushing for ESG-focused offerings, but according to the report, they fear “greenwashing”: the use of misleading labels or advertising to create just an illusion of environmental responsibility.
The report is a collaboration by the Alternative Investment Management Association, KPMG, Chartered Alternative Investment Analyst Association and Create-Research. They surveyed 135 institutional investors, hedge fund and long-only managers, and pension consultants in 13 countries.
Some managers are embracing ESG:
- Larry Fink, chairman of BlackRock, said last month that the mutual fund manager would focus on climate change in assessing its $7 trillion portfolio.
- Billionaire Chris Hohn said in December that he will push companies to dramatically reduce greenhouse gas emissions and disclose their carbon footprint.
- Quant trader David Vogel’s firm, Voloridge Investment Management, is seeking $1.5 billion for a hedge fund focused on climate change.
- Billionaire Marc Lasry’s firm, Avenue Capital Group, plans to raise as much as $600 million for its first private debt impact investment fund, a person with knowledge of the matter said last month.
Another manager that has started to incorporate ESG in its investment process is CQS, which is run by Michael Hintze. But the billionaire has also been a supporter of the Global Warming Policy Foundation, a U.K. think tank “deeply concerned about the costs” of policies intended to fight climate change.
