Institutional investors are pushing hedge funds to adopt ESG in their investment decisions. These investors see ESG investing as a way to serve their own long-term interests and wider society.

This is the key takeaway of a new report: Sustainable Investing: Fast-Forwarding its Evolution.

KPMG, the Alternative Investment Management Association (AIMA), Chartered Alternative Investment Analyst Association (CAIA) and CREATE-Research wrote the report. They launched the findings today at the Cayman Alternative Investment Summit, Grand Cayman.

KPMG Report on Institutional Investors.

The report surveyed 135 institutional investors, hedge fund managers and long-only managers with total assets of USD$6.25 trillion in 13 countries. The survey shows more investors now expect their asset managers to deliver attractive financial returns while considering the environmental and social risks associated with their investments.

“Thus, the traditional risk-return equation is being rewritten to include ESG factors,” said Anthony Cowell, Head of Asset Management, KPMG in the Cayman Islands. “In the hedge fund industry, ESG has gone from being a nice-to-have to a must-have.”

Roughly 45% of institutional investors now base their investments in ESG-based hedge funds on the view that they offer opportunities to generate alpha, while also offering a more defensive portfolio that looks beyond the blind spots in markets that are slow to price in ESG risks.

Adopting ESG At the Hedge Fund Level

Hedge fund managers have responded by advancing in the familiar ESG adoption cycle. Currently, 15% of surveyed hedge fund managers define themselves at the ‘mature’ stage. This stage of ESG takes place across the firm via appropriate policies, committees, research, and data. A further 44% are at the ‘in progress’ stage, while 31% are still at ‘awareness raising’ stage; leaving the remaining 10 percent as ‘no implementation to date’.

“Sustainability is set to reshape the ecosystem of capital markets and the behaviors of their participants. It requires mindset shifts from the way investing has been done historically,” said Andrew Weir, KPMG Global Head of Asset Management, KPMG International, and a partner with KPMG China. “It will become the gold standard in investing.”

In the process, surveyed hedge fund managers use three avenues:

• Incorporating ESG factors into the investment process (52%),
• Excluding securities that sit uncomfortably with the personal values of investors (50%), and;
• Shareholder engagement (31%).

Currently, 29% of hedge fund managers and 11% of institutional investors report positive outcomes. The scale of adoption and the outcomes so far face difficulties in creating a direct line of sight between ESG factors and their investment outcomes.

Report Conclusions

Finally, the survey report concludes that ESG investing across the broader financial service will gain further traction with governments, regulators, asset owners and asset managers collectively pulling in the same direction. Further, ESG concerns are the biggest challenges of our age. Leaders can make a huge difference. Again, to read the report, visit here.