It’s complicated

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Hedge funds have not been known for embracing the sustainability cause quickly or willingly. Well, it is part of their image, I suppose. Being the coolest kid on the block means you need to maintain your air of detachment, no matter what.

To be fair, it has been relatively easy for a sophisticated hedge fund investor to justify a sceptical stance to all things green and fair. Genius quants are bound to scoff at the poor quality and consistency of ESG data. Veteran hedgies can’t help ridiculing the confusion in terminology and methodology, courtesy of a young investment discipline.

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They might have reasons to sulk, too, misunderstood or simply ignored in the sustainability debate as they often are. There have been few and rather feeble attempts by regulators to offer guidelines about investment instruments and techniques crucial to the hedgies. Short exposures, commodities or derivatives are yet to be addressed by anyone but their own industry associations.

And so, they turn their backs to ESG and declare the whole thing “irrelevant,” “immaterial, or “impossible to quantify.”[1]

Smirking at the naïveté of the masses and cleverly awaiting the ESG “fad” to die away might not be quite the winning strategy anymore, however. Increasingly, investors are demanding a coherent sustainability framework from their asset managers, including hedge funds. Those who ignore the trend may face significant headwinds as they seek to raise capital in the future. So, even if they are not too keen on transparency and disclosure, hedge funds are succumbing to the pressure and warming up to the trend, ever so slowly.

It is a welcome development. The world of sustainable investments stands to benefit greatly by admitting these new converts. Fellow CAIA charter holder Emeline Taris at Neuflize OBC put it rather eloquently at a webinar on hedge funds and ESG integration earlier this week. She had three great arguments for why it is such a good match. First, hedge funds possess the technological edge and know-how necessary to measure and understand risk exposures, including ESG ones. Second, they are flexible and bold enough to tap into various asset classes and use creative instruments and techniques, anything to get results.

Last but not least, Taris reminded us, hedge fund managers might be newbies when it comes to sustainability, but they are old hands at shareholder engagement and addressing governance issues in general.

If you still have doubts, look at the fantastic coup performed by Engine No. 1, the little hedge fund that shook Big Oil last week. Just six months old and owning a meagre 0.02% of ExxonMobil, the hedge fund, instigating an activist campaign to turn ExxonMobil away from fossil fuels, managed to get two of its nominees elected to ExxonMobil’s board, much against the company’s wishes. Now, how cool was that?

[1] These are the exact words that 56% of hedge fund managers used to describe ESG integration, according to a survey conducted by BNP Paribas, Hedge Funds and ESG: Finding Their Place on the ESG Spectrum, published in October 2020.

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The coronavirus epidemic has further accelerated the rise of ESG into the investment mainstream. As deficits skyrocket, bond investors have an opportunity to engage with governments on climate change, argues Thomas Dillon, Senior Macro ESG Analyst at Aviva Investors.

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