Being one of the pioneers among Nordic hedge funds to adapt its investment strategy to ESG guidelines, QQM fund management announced its negative screening efforts already in 2014. Now, the market neutral fund manager aims to take the next step in becoming a truly green option in the alternative investment space by altering its cash management principles.
”We were early adopters, as a hedge fund, addressing ESG-issues already in 2014. At that point, I believe we were the only Nordic hedge fund to incorporate a negative screening tool into our investment process”, Andreas Julin, QQM’s Head of Investor Relations explains when HedgeNordic meets up with the manager at their Stockholm office overlooking Hötorget.
The negative screening that Julin refers to is based on the United Nations so called ”compact list” which is a list that stems from the world´s largest corporate sustainability initiative, calling for companies to align strategies and operations with principles on human rights, labour, environment and anti-corruption.
”It was a natural step for us, at the time, to incorporate these principles into our investment process. While many were talking about aligning their strategies to this initiative, we took action early on. Partly, this was a request from investors, but more importantly we wanted to show a firm commitment to these questions that we deem to be of vital future importance.”
In practice, the decision from QQM to adhere to the UN Global Compact initiative meant reviewing its current investment universe as well as making sure that future additions to this universe complied with the rules set forth by the UN.
”Up until now, our process has only been focused on excluding companies that do not live up to the UN compact list requirements. For that purpose we have a cooperation in place with an outside consultant company called ISS Ethix, who are continuously updating us on the companies that we are allowed to invest in and who needs excluding. So far, the impact has been relatively limited, excluding only 1-2 percent of our total investment universe of 600 companies”, Julin explains continuing:
”The negative screening has had no negative effect on our overall performance and we do not foresee it to have any negative impact on our ability of generating alpha over time, rather the opposite. When we now take the next step in our ongoing work to become a truly green hedge fund alternative, the positive effects will become even more evident.”
A GREEN BOND INITIATIVE TO CASH MANAGEMENT
The next step that Julin refers to is a firm wide decision to also incorporate a positive screening with regards to ESG principles. This will be applied to the cash management part of the portfolio.
”We are bringing in green bonds to our cash management, in other words we will invest the part of the portfolio that is held in cash or cash equivalents into bonds that support sustainable projects. In doing this, we will further strengthen our ESG-profile”, Julin says.
The green bond investments will be carried through by direct investment as well as indirectly through investment grade green bond funds or through funds with a clear ESG-profile, according to Julin. He however highlights that it will not alter the risk profile of the QQM Equity Hedge program.
”As the market for green bonds has grown and with investment options becoming more accessible and liquid, we have decided to shift the portfolio’s cash portion from being held in bonds with highly rated issuers into green alternatives with a similar risk profile. We will have the same credit risk but with a profile leaned towards green projects. The investment will also hold the same duration as previously to make sure that we do not alter the fund´s risk characteristics.”
Julin believes that QQM have an advantage with respect to how flexible they can be on the cash management side compared to the average hedge fund, which ultimately has given them the opportunity to bring in green bonds.
”Unlike many other long/short equity hedge funds, that in varying degrees are dependent on returns generated from cash replacement products, QQMs results are solely driven from alpha in stock selection. Without altering the return targets for the fund we can therefore easily incorporate ESG compliant investment options. Investing into highly rated green bonds would for many other funds involve taking on less credit risk and translate into lowered return targets.” For QQM there is now conflict between sustainable investing and financial ambitions.
According to Julin, the work the company has done on ESG questions during the past 2.5 years, caters for a smooth transitioning with regards to the green bond initiative and also gives credibility to QQM as a true practitioner of sustainable investment solutions.
”Employing a positive screening approach with regards to ESG investments is very rare in the hedge fund space today, even on a global scale. We were early in adopting a negative screening and see no reason for us not to continue on the same path for positive screening measures. Of course this is partly a decision that stems from increased investor demand, but we firmly believe that it will also have a positive impact on our investment work as well as having us contributing to a better future.
QQM’s green bond initiative is well underway and Julin foresees it will be fully implemented already this year.
”We have already made our first green bond investment and I foresee that we will have our cash positions fully transitioned in the beginning of next year. ”
QQM has filed a revised policy document to ISS Ethix who, as with the negative screening oversight, will be responsible for overseeing the green bond positions in the cash book. In order for the process to be discussed and reviewed on a continuous basis, QQM will also form what is referred to as an ”ESG Committee”, again with ISS Ethix as an active independent partner, ensuring an objective revision.
”The ESG Committee will be consisting of three members including an external representative as an independent consultant. This is a way for us to ensure credibility. We will have two meetings per year discussing ESG-related issues and how to work proactively to meet increased demands for sustainable investment solutions among our clients and prospective clients.”
Julin also stresses that there is likely to be additional initiatives undertaken to get further recognition as an ESG compliant investment manager and that these questions will remain a top priority for the foreseeable future.
”We have yet to be PRI-certified but our ambition is to go that route as well. In order to meet the increasing demand for fossil free alternative investments solution we can already provide clients with tailor made fossil free versions of the QQM Equity Hedge on managed account basis. This said, we take the environmental and social governance questions very seriously. The fact that there are climate change issues that have a direct effect on the environment surrounding us is a constant reminder that things need to be addressed, sooner rather than later.”