Hedge funds are waking up to ESG (and hiring)

Re-badging senior investment professionals as 'head of ESG' is kicking the can down the road

In this series, Tom Strelczak, founder of independent search firm TWS, explores the recruitment trends in senior level ESG and sustainable investment roles within the asset management space.

In the past 18 months alone, TWS has partnered with fourteen hedge funds in London and the US, advising senior management on primary sustainable investment hires as well as longer term ‘team builds’ associated with a specific ESG strategy.

Considering investor commitment, the sustainable investing market has been driven primarily by institutional investors in the past few years. Institutional investors from whom hedge funds receive significant growth are seeking sustainable investment solutions, to which attention must be paid.

See also: – Recruitment trends: The shortage in ESG talent

This knock-on effect along with the growing pressure from the broader market has clearly been one of the driving motivations for firms to get ahead of the competition and develop meaningful strategies while maximising their risk/return potential.

Why are hedge funds interested?

Over the past year, there have been numerous studies investigating and appetite for ESG integration within the hedge fund market. One of the most significant of these was conducted by BNP Paribas, which surveyed 53 hedge funds with a combined assets under management of over half a trillion US dollars. This report concluded that 40% of these were including ESG factors into their investment process, while the remaining 60% were not. Another study determined ‘that 51% of asset allocators to hedge funds had no ESG strategies in their alternative’s portfolios, with 90% having less than a 10% allocation to ESG strategies’.

Even those funds who were integrating ESG already had mostly only begun doing so in 2018, which by implication, suggests the remaining 60% will be in line by 2022. Whether this happens or not remains to be seen. The question for hedge funds is whether there is an inherent belief that ESG can positively impact performance, or whether it is simply a question of assuaging investors who are increasingly demanding more ‘purpose’ from their money. In conversations with my clients, the more committed funds are beginning to identify the evidence of financial materiality around sustainability issues and by implication, the opportunities for alpha generation.

See also: – The most desirable ESG roles within asset management

There still exists a first mover advantage as currently there are very few impact investing leaders in the hedge fund market. As mentioned, investors are keen to see ESG-related products as part of their investment group, and for funds with the mind to do so, this could represent an opportunity to attract new clients, but also develop a more profound relationship with their existing ones. Reacting to investor demands around sustainability with not just speed and lip service, but authenticity and sincerity will be key to growing market share.

What sort of people are hedge funds hiring?

Most hedge funds in the market are either making their first ESG hires or are adding minimal resource to lean team structures. As such, unlike far larger ESG teams at institutional asset managers, these one or two hires often bear the weight of expectation from the business itself. This means that incoming ESG professionals often require hands on investment exposure alongside their understanding of ESG strategy, key issues and regulatory developments. Our clients often view the CFA designation as a mandatory qualification in the candidates under consideration to lead on ESG.

In most cases, the obvious route would be to make these hires by poaching from other hedge funds in the market, but as we know, this corner of the industry is not significantly developed for this to be an option. As a result, clients tend to identify candidates from the institutional players with a track record within sustainable investing.

That said, whereas larger team structures tend to specialise their employees around integration, research and active ownership, hedge funds will more likely need candidates who are generalists. Not only generalists, but those who are capable of operating in a highly visible role with high expectations often reporting directly into the CIO or CEO of the business. These candidates must have exceptional communication skills, be able to manage conflict and push back from the business, which should be expected in the early adoption phase for most firms.

See also: – IIGCC paves the way for net-zero hedge funds

We have spoken with several clients in this sector who often rebadge senior investment professionals as their ‘head of ESG’. While this short-term and seemingly cost-effective measure may appease investors and help with ESG branding for outgoing marketing collateral, it is often a case of simply kicking the can down the road. With the wider industry making significant moves in this space (and investors becoming far more savvy around sustainability as a whole), a longer-term commitment to this sort of strategy is the only way to profile oneself amongst the competition. Depending on the asset class, we find clients who repurpose senior management as sustainability experts often resort to making dedicated ESG hires with experienced practitioners.

What should candidates be mindful of before moving to a hedge fund?

We advise our clients that showing commitment to ESG before hiring someone into the role, is the key to attracting the best talent in the market. This means that it should be a top-down strategy, with anyone leading ESG, reporting into the top levels of the investment team. This is the only way to truly integrate ESG into the investment process and having that buy-in and support from the top of the business is essential.

Some firm’s will have these hires reporting into their legal counsel or head of compliance, which will put off most ESG candidates from the start. In a candidate market that has been undervalued for many years, the high compensation packages that hedge funds offer can be really tempting for most. However, if the role ends up being on the fringe of the business and largely superficial in nature, this sort of position is unsustainable for any candidate who is keen to make a measurable impact.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...