Sandrine Ferdane

A BNP Paribas Corporate and Institutional Banking (CIB) survey of 53 hedge funds with a combined AUM of over half a trillion USD has found that 40% include environmental, social and governance (ESG) considerations in their investment process.

The survey highlights that hedge funds are reaching a tipping point of incorporating ESG into their decision making, finding that the majority of funds will integrate ESG no later than 2022. The key findings include:

• Tipping point & drivers: 40% of hedge funds surveyed integrate ESG into their investment process, driven by client demand (71%) and investor requirements (67%). Consequently, a variety of ESG investment styles have been added to traditional hedge fund strategies. ESG integration is reaching a tipping point; by mid-2022, 57% of surveyed funds will be incorporating ESG, and likely to be earlier given market dynamics.
• Characteristics challenges: 60% of participants do not currently integrate ESG. Some remain sceptical that ESG-related products/data sets can improve risk-returns and question whether they can be successfully combined into existing hedge fund investment strategies.
• Barriers: Of the surveyed funds integrating ESG, only 48% are driven by the belief that it will improve their risk-return profile. 67% of them cite social factors as the most difficult to analyse and incorporate. There was also an ‘action gap’ between the familiarity of sustainable products and uptake.
• Corporate sustainability: Hedge funds are becoming increasingly aware of their responsibilities to the environment and society. Currently 55% of all respondents use ESG principles in the management of their companies driven by firm leadership, and 62% are measuring their operational carbon footprint.
• Mainstreaming in the future: Over 50% of respondents believe there will be increased demand for ESG-integrated investments post-COVID. Furthermore, 85% of funds integrating ESG expect more regulatory disclosure requirements in the next year, with the majority taking a greater role in ESG consultations. 

Similar to the 2019 BNP Paribas asset managers and owners’ survey, social factors and data remain  current challenges as 1 in 5 hedge funds do not integrate ESG due to lack of data.

Sandrine Ferdane, BNP Paribas Global Head of Financial Institutions Coverage (FIC) emphasised: “As we have seen across the investment landscape, hedge funds are evolving to integrate ESG into their decision making. It is clear that hedge funds are starting to measure and manage certain ESG considerations – especially within their operations.”

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