Alternatives managers split on the benefits of ESG, finds Unigestion

• Unigestion finds significant increase in number of hedge funds and private equity managers showing an interest in ESG
• Nearly half of hedge funds surveyed are now showing some interest – up from 40% last year
• 30% of managers are actively incorporating ESG in their investments processes
• Private equity managers more advanced in ESG adoption than hedge funds
• Larger firms are more likely to implement ESG policies than smaller firms, and European managers are ahead of US managers

The survey showed that more hedge funds are considering the value of ESG, as last year 60% of hedge fund managers were ‘reluctant’ to consider ESG as part of their strategies, whilst this year only 53% of hedge fund managers were in the ‘no interest’ category1. 30% of hedge funds managers surveyed were actively incorporating ESG into their strategies (figure 1).

Figure 1: Hedge Fund interest in ESG

Whilst there were a number of strategies represented in this sample, the clear leaders in ESG adoption were Arbitrage managers – 67% of which had an active ESG strategy. Tactical traders (including commodities, managed futures and global macro strategies) find it the most difficult to implement ESG into their investment processes because of the nature of the strategy (figure 2).

Figure 2: Hedge Fund interest in ESG by manager type

One of the managers surveyed, Winton Capital, explained that its approach to ESG encompasses broad initiatives such as sponsoring research prizes. In addition, its headquarters are a certified Low Carbon Workplace, one of only 8 in the UK.

Small and large firms also diverged in their approach to ESG. Whilst the survey showed that large firms are more likely to have in place a formal ESG policy than smaller firms, there are again exceptions. Arrowgrass Capital Partners has USD 5.9bn under management and has a strong ESG policy having partnered with an ESG data provider and a responsible investment consultant, and having its CEO and other members of the senior executive sitting on its ESG committee.

The survey also showed more hedge funds are becoming signatories to the PRI. Last year only 13% of hedge funds surveyed were signed up to the principles, whilst this year 20% had signed up (figure 3). As the practicalities of incorporating ESG into investment strategies is still a stumbling block for many managers, the PRI is spearheading a working group to create a standard ESG due diligence questionnaire for hedge funds.

Figure 3: Hedge Fund PRI signatories

Private equity managers are on the whole more advanced than their hedge fund counterparts in ESG adoption, and Unigestion has also seen a larger year on year improvement in this asset class. This year, 42% of private equity managers achieved ‘advanced’ or ‘leader’ status (up from 29% last year) and the proportion of ‘reluctant’ managers fell from 27% to 21%.

The survey shows variation between private equity managers linked primarily to size, geography and nature of the strategy – with 95% of large firms showing interest in ESG compared to only 63% of small firms (figure 4), and almost double the number of European managers than US managers showing interest at 94% vs 52% respectively (figure 5).

Figure 4: Private Equity interest in ESG by firm size

Figure 5: Private Equity interest in ESG by firm location

The clear private equity ESG leaders are buyout managers, with 45% of managers scoring ‘leader’ or ‘advanced’ status, another 29% with ESG policies in progress, and only 10% of managers showing reluctance (figure 6).

Figure 6: Private Equity Buyout manager ESG interest

By comparison, 46% of venture capital managers are reluctant to introduce ESG policies (figure 7), though this is still a significant improvement on last year (60% reluctant). Special Opportunities managers also showed strong results, with 53% of managers in the ‘leaders’ or ‘advanced’ category, though 31% are still reluctant (figure 8).

Figure 7: Private Equity Venture Capital / Growth manager ESG interest

Figure 8: Private Equity Special Opportunities manager ESG interest

Eric Cockshutt, Responsible Investment Coordinator at Unigestion, said: “We are still seeing too many hedge fund and private equity managers dismissing ESG as a cost burden, incompatible with their strategies, or a mere marketing exercise. The experience of many managers however is that ESG adoption is both feasible and beneficial to clients and the company’s overall reputation for taking seriously its environmental and social responsibilities.

“We hope that our work with bodies such as the PRI and with managers who are practicing strong ESG policies acts as an example and makes it easier for more firms to realise that ESG has serious long-term importance and implications.”