Less than half of hedge funds integrate ESG: survey

Applicability to investment strategy continues to be a key barrier to integrating ESG factors for hedge funds.

Around 60% of hedge funds globally do not currently integrate ESG factors (ex-ESG) into their investment process, according to a survey conducted by BNP Paribas Corporate and Institutional Banking to 53 firms with a combined AUM of at least $500bn (see geographical breakdown below).

The survey found that 66% of ex-ESG funds also have no plans to integrate in the future. Around 56% of them believe that their trading strategies or asset classes make ESG irrelevant or impossible to quantify. Other barriers to integrating ESG include weak client demand (31%) and the lack of evidence to support returns (25%).

On the flipside, 40% of the survey respondents said they have integrated ESG (ESG-in), which compares to just 13% in 2018.

According to the survey, 67% of ESG-in funds them started integrating in the past two years. The key drivers for all ESG-in funds include increased client demand (71%), investor requirements (67%) and improving risk/return profile (48%).

BNP Paribas expects that by mid-2022, 57% of the hedge funds it surveyed will be integrating ESG.

The future drivers for integrating ESG include the increased demand for ESG-integrated investments post-Covid-19, according to 55% of all respondents. In addition, 85% of ESG-in firms expect more regulatory disclosure requirements in the next year.

However, the report noted that size matters, as most of the ESG-in funds are larger in terms of AUM and headcount. In addition, only 10% of ESG-in funds have in-house ESG specialists, and most are opting for cost effective measures, as 62% choose to train incumbent teams as opposed to 38% of those that are hiring.

In terms of applying ESG to their corporate culture, around 55% of all respondents use ESG principles in the management of their companies driven by firm leadership, and 61% are measuring their operational carbon footprint.

Around 42% view the sustainability of their operations to be either very or extremely important, even if they are not integrating ESG into their investment processes, the report added.

“As we have seen across the investment landscape, hedge funds are evolving to integrate ESG into their decision making. It is clear that hedge funds are starting to measure and manage certain ESG considerations – especially within their operations,” Sandrine Ferdane, BNP Paribas global head of financial institutions coverage, said in the report.

Around 40% of the survey participants came from the UK, 28% in North America, 19% in Asia and 13% in the rest of Europe.