Hedge funds increasingly are moving toward screening for environmental, social and governance investing, according to a new study by Backstop BarclayHedge, a financial technology and research firm. In fact, 41% of those survey stated they do take ESG into account when selecting equities for portfolio inclusion. And this is nothing new: those who do use ESG on average have been including it for six years.
The number of funds that plan to implement ESG into their methodology next year jumps to 58%, BarclayHedge found, noting “the trend is consistent with reports that ESG investing grew at record levels during this year’s first quarter.”
Sol Waksman, president of Backstop BarclayHedge, told ThinkAdvisor he wasn’t too surprised by the results. “Big picture, based on the survey as well as newsletters I read, more investors are looking at ESG for their portfolio holdings. I don’t know if it’s become a movement, but people are focused on it now.”
On average, of those hedge funds using ESG as a screen, 52% of assets are allocated based on ESG ratings. Further, 41% of those that use ESG as a screen indicated it factored into 100% of their asset allocations.
The study also found that of those hedge funds that use ESG for screening, 62% use it for both long and short positions, while 38% use it only to screen for long positions.
“Governance” is by far the criteria most used as a screen for hedge funds — in fact, 61% of funds considered it for short and 56% for long candidates — of the three categories. The study noted: “This is another finding that probably shouldn’t be surprising given the positive correlation studies have shown between governance and company performance.”
Environmental criteria was used for 28% short selections, and 18% for long. Social was the criteria 11% for short side candidates, but was the second most important on the long side: 26%.
There might be more emphasis for social criteria on the long side than on the short side, because of “growing investor recognition of the value of intangible assets like brand or customer loyalty — and how easily the value of those assets can be eroded through reputation-damaging human capital or supply chain events or other negative social factors,” the study noted.
Study findings were based on 70 responses by hedge funds taken between June 24 and July 11, 2019.
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