Hedge funds split over ESG ahead of COP26 climate summit

As the 2021 UN Climate Change Conference (COP26) begins in Glasgow this weekend, hedge fund managers remain evenly split over the incorporation of ESG (environmental, social and governance) factors and sustainability metrics into their investment processes, according to a new poll.

Just over half – 53 per cent – of fund managers surveyed by Hedge Fund Research said they incorporate ESG factors or risks into their investment process – a total of 687 managers – while 47 per cent, or 609 fund managers, said they did not.

Over the course of 2020 and 2021, HFR quizzed hedge fund managers in their database on the incorporation of ESG into their investment processes.

Ahead of the COP26 summit in Scotland – which is seen as a pivotal moment in the fight against climate change – HFR’s survey found that three-quarters of funds engage with their portfolio companies on ESG issues, while 25 per cent did not. 

Meanwhile, 77 per cent of funds interview said they consider climate change in their investment processes, while 23 per cent did not.

As impact investing and sustainability themes have come into sharp focus over the past decade, ESG investment factors have gained greater prominence within the global asset management industry, with allocators placing ever-greater scrutiny on how their portfolios and investments meet the climate challenge.

A wide-ranging study by Deutsche Bank last year found that ESG factors now shape the allocation decisions of roughly two-thirds of hedge fund investors.

A number of high-profile hedge fund firms – including Sir Chris Hohn’s TCI Fund, Caxton Associates, and Man Group – have emerged as vocal ESG advocates. Earlier this summer, US activist hedge fund Engine No. 1 secured three members on the board of ExxonMobil as part of its push for clean energy reforms at the US oil giant.

However, in a separate survey carried out earlier this month by EisnerAmper, just 17 per cent of  hedge fund executives said their firm had an ESG portfolio. They pointed to a lack of standardised reporting and datasets (48 per cent), sourcing quality investment opportunities (20 per cent), and dispelling the notion of poor returns (17 per cent) as the biggest barriers to integrating ESG into their funds. 

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