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ESG Incorporation in Hedge Funds

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Whereas traditional asset managers have relatively quick to incorporate Environmental, Social and Governance (ESG) criteria into their investment decisions, hedge fund managers have generally been slower to take up, partly because of the nature of their strategies. In a recently published guide by the PRI, several hedge fund managers and investors, including Brummer & Partners, share their knowledge and insights on how to integrate ESG into different hedge fund strategies.

The heterogeneous nature of hedge fund strategies leads to fundamental differences in terms of how hedge fund managers can develop and incorporate a responsible investment (RI) policy. Some hedge funds such as long/short equity funds are better positioned to integrate an RI policy than other vehicles such as systematic trend-followers. Nonetheless, the technical guide by the PRI, a leading proponent of responsible investment, provides a suggested framework for fund managers and asset owners to incorporate ESG factors into hedge fund strategies.

“Capital allocation to hedge fund strategies by institutional investors has grown rapidly over the last ten years and is continuing to accelerate,” Fiona Reynolds, Chief Executive Officer of PRI, writes in the guide’s foreword. “In the context of responsible investment, the growth of this asset class presents both opportunities and challenges for global asset owners,” she emphasizes. “The time has come for the hedge fund industry to think about responsible investment beyond new products, increasing AUM or identifying new investment opportunities and risks,” says Reynolds. “Market participants must now widen their perspective to consider their role and responsibility as stewards of assets.”

The paper by PRI identifies client demand, materiality and regulation as the main drivers behind the increasing interest in responsible investing in hedge funds. The central pillar of this guide focuses on how a responsible investment framework can be incorporated, developed and implemented by hedge fund managers in response to these drivers. The guide is divided into four modules: I) Policy; II) Governance; (II) Investment Process; IV) Monitoring & Reporting.

To read the “Technical Guide: ESG Incorporation in Hedge Funds,” click here or below:

Photo by Aron Visuals on Unsplash

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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