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Hedge Funds Get New ESG Guide As Industry Pushes For More Adoption

On May 13th, the Principles for Responsible Investment published a new guide designed for hedge fund managers to help them with their ESG implementation plans. The guide, which contains four primary topics related to responsible investing, is the latest attempt to help the hedge fund industry get better at adopting ESG considerations.

The PRI began the process of developing the guide began on the heels of the publication of the PRI’s Responsible Investment DDQ for Hedge Funds back in 2017. Five working groups covering equity long/short, macro, relative value, event-driven and ‘other’ investment strategies were created so that strategy-specific concerns and opportunities could be raised and considered. The resulting guide provides more clarity for both hedge fund managers and asset owners with regards to setting expectations in the opaque world where hedge funds and responsible investing meet.

“Asset owners want to see hedge funds doing more,” said Marisol Hernandez, Head of Asset Owners at the UNPRI. “ESG is becoming a key manager selection criteria. Hedge funds that don’t have ESG considerations in their due diligence process are unlikely to attract institutional capital in the long term. They want to see more transparency, more disclosure and more accountability in their responsible investment practices. The guide helps hedge fund managers to create and implement a responsible investment infrastructure.”

The central pillar of this guide focuses on how a responsible investment framework might be incorporated, developed and implemented by hedge fund managers to respond to these drivers. It is divided into four modules or steps: I) Policy; II) Governance; III) Investment Process; IV) Monitoring & Reporting.

“They follow an order. First is the policy; a policy is key. It needs to be embedded in the management company’s structure. Hedge funds employ very smart people and have access to quality technology and infrastructure. It should be fairly straightforward for a hedge fund to implement and manage a responsible investing policy, both at the management company level and the fund level,” said Hernandez.

Hernandez’s reference to both the firm and the fund is mirrored in the guide. Much of the coverage of the ESG world relates to the investment side as opposed to the management company side. She says that it’s critical that hedge fund managers understand that a commitment to responsible investing is a holistic one.

“Asset owners want to see ESG factors implemented across the whole investment chain, which includes the management company. It’s not enough for, say, a long/short equity hedge fund to pick strong ESG stocks, or short bad ESG stocks. The entire process has to be consistent with the asset owner’s approach to ESG and the mandate given to the hedge fund manager,” she said.

The PRI is hopeful that, now a baseline has been established, that more hedge funds will take responsible investing more seriously, and that, given the current challenges facing the global economy and society at large, those that do will be in a strong position to raise capital.

“We want more hedge fund managers incorporating ESG factors into their investment decisions and capital allocations and we also want more industry associations to become more hands-on. We want to see more innovation from hedge fund managers, specifically regarding products that do what they say. If I were a hedge fund, and I haven’t previously thought about ESG considerations, I would now because the guide provides hedge fund managers with a baseline for their conversations with existing and potential investors. It is particularly relevant in the current environment because of Covid-19. After the pandemic, there will be those that did ‘the right thing’ and now is the moment for them to shine. I say to hedge fund managers ‘do you want to be in the passenger seat or do you want to be a driver of change?’ because it’s the drivers of change who will be in a position to secure allocations from institutional capital in the coming years.”

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