Alternatives Still Struggling with ESG

    Stockholm (NordSIP) – “Sustainability is an opportunity”, says Andrew Draeneen (pictured), Head of Liquid Alternatives strategic capability at Schroders, in an interview with NordSIP. “ESG is very real in alternatives, just as it is in the traditional long-only space. There are a lot of strategies and investible bonds and equities that focus on those opportunities, be it cleantech companies, blue bonds, etc.”

    “However, most of these strategies are long-only.” Alternative investors struggle with this aspect of sustainable investing, according to the Head of Liquid Alternatives. “Clients have asked us whether there is an ESG-compliant short-selling strategy, whether it is ethical, and if so, which companies should be sold short.”

    Many investors rely mostly on exclusions to express their responsible approach, according to Draeneen. “However, focusing on exclusion lists might not necessarily be a profitable approach even if those firms are not ethical. A firm can be unethical but still make profits.” Exclusions may also come in the way of shorting.

    The industry is trying to grapple with shorting sustainably, according to Draeneen. “Most of the managers we have talked to struggle to identify a strategy that makes sense on the short side of sustainability. What we hear is that ethical concerns should not be used in isolation but rather that ESG integration into the broader investment process is crucial. It is a bit like short-selling an expensive company. It can always become more expensive. You need to have several metrics to make a strong short-selling case.”

    “At Schroders, we have a big team and want to be best in class. All of our investment teams and funds integrate ESG into their processes, not just to pay lip-service to it but have it tabled into the process in the next year or so.” According to Draeneen, the rest of the industry is not following. “On the external manager side, in the hedge fund world, we have not seen a rush to address SRI integration. They are considering ESG integration, but they are still first and foremost seeking to produce the best return without any restrictions beyond their mandate.”

    Draeneen concludes on a hopeful note. “I expect that the strong interest from clients should trigger innovation from asset managers.” Imagine what could be achieved if alternative investors embraced sustainability.

    Picture © NordSIP

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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