Hedge funds have been slowly adding ESG factors to their investment approach due to pressure from institutional clients. ESG factors are criteria used to screen investments on the factors of environmental, social and governance.
A survey of fund managers conducted by KPMG International and CREATE-Research found that 44 percent of the funds were going ahead with plans to add ESG factors, while 15 percent say they have already added ESG factors into their research and policies.
Additionally, 31 percent state that they are at the “awareness-raising” stage, and 10 percent said they were not implementing ESG factors at this time.
Investor interest in sustainable investing continues to surge, especially in Europe where investors have doubled their inflows into sustainable funds during the past two years.
Institutional investors have become more insistent that their capital is used to generate more positive environmental and social outcomes. At the same time, these same investors are demanding that their portfolios not be exposed to the “sin” industries like weapons manufacturing and fossil-fuels.
The use of shorting by some fund managers to short companies that are considered to be the opposite of ethical or environmental issues has been debated as a way to put pressure on companies to change their course. Other investors believe that short selling is not compatible with sustainable, long-term investing.
This study comes out after a disappointing year for hedge funds. In 2019, hedge funds returned about 10 percent, compared to a 30 percent return for the S&P 500.
Hedge fund manager Christopher Hohn of The Children’s Investment Fund is one of those who strongly support ESG investments. His fund was one of the world’s best-performing hedge funds in 2019.
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