Hedge funds are increasingly incorporating environmental, social and governance (ESG) considerations into their decision-making. A new survey by BNP Paribas, involving 53 hedge funds with over US$500 billion of combined assets under management, reveals that 40% have already integrated ESG into their investment process, driven by client demand (71%) and investor requirements (67%).
In fact, ESG integration is reaching a tipping point. By mid-2022, 57% of the surveyed funds will be incorporating ESG, the survey finds.
However, 60% of participants have yet to attain ESG integration. Some remain sceptical that ESG-related products and data sets can improve risk-returns and question whether they can be successfully combined into existing investment strategies.
Among the funds integrating ESG, only 48% are driven by the belief that it will improve their risk-return profile and 67% cite social factors as the most difficult to analyze and incorporate. There is also an “action gap” between familiarity with sustainable products and uptake.
Still, hedge funds are becoming increasingly aware of their responsibilities to the environment and society. About 55% of respondents use ESG principles in the management of their companies and 62% are measuring their operational carbon footprint.
The survey finds that over 50% of respondents believe there will be increased demand for ESG-integrated investments post-Covid. Also, 85% of funds integrating ESG expect more regulatory disclosure requirements in the next year, with the majority taking a greater role in ESG consultations.