Fewer than half of hedge fund industry investors are currently applying environmental, social and governance (ESG) factors in making equity investment decisions. But, for those that do, the impact on their portfolios is considerable and growing, according to the Backstop-BarclayHedge Fund Manager Survey compiled by BarclayHedge, a division of Backstop Solutions.
The survey found that more than four in 10 – 41.4% – of respondents consider ESG factors in selecting equity securities. Of those considering ESG factors, on average 52% of assets are currently allocated based on ESG ratings.
While 42% of assets were allocated last year based on ESG factors, that percentage jumps to a projected 58% of assets next year. Several survey respondents indicated that ESG ratings were a factor in 100% of their allocations.
“The increasing role of ESG ratings among the survey participants isn’t surprising,” said Sol Waksman, president of BarclayHedge. “Several factors are converging that are driving the trend. One is an increased interest among managers in social impact investing. There’s also a growing recognition of the link between governance and performance. Finally, the growing awareness of how human activity causes climate change has led investors to place greater importance on trying to reduce the impacts of the most egregious activities.”
Of the respondents that use ESG factors, a considerable majority – 61.5% – use ESG factors to screen candidates for both Long and Short positions. Among investors considering both Long and Short candidates, governance is the most important of the ESG considerations, according to the survey. The emphasis on social factors is greater in considering Long candidates than Short candidates, however.
On average, investors considering ESG factors in making equity investment decisions have been doing so for nearly five years, the survey found.
