Bridgewater Launches Sustainability Fund Amid Increasing Demand for Impact Investing

How the world’s largest hedge fund firm is embracing the strategy.

Jonne Roriz/Bloomberg

Jonne Roriz/Bloomberg

Bridgewater Associates is the latest firm to create a sustainability focused fund.

The world’s largest hedge fund firm launched Bridgewater All Weather Sustainability, LP earlier this month with $2 billion of committed capital, according to investors and a regulatory filing.

An Undertakings for the Collective Investment in Transferable Securities version of the fund, called The Lyxor and Bridgewater All Weather Sustainability fund, will give investors access to Bridgewater’s All Weather Sustainability strategy. It is managed by Lyxor Asset Management and sub-advised by Bridgewater.

Later this month it will offer an application of the Lyxor UCITS fund that is accessible to the Brazilian market.

The new sustainability fund is headed up by Karen Karniol-Tambour and Carsten Stendevad, Bridgewater’s co-chief investment officers for sustainability. In discussions with the co-CIOs as well as in Bridgewater documents, the firm emphasizes what it calls “Three Dimensional Portfolio Engineering,” the notion being that in addition to seeking risk and return targets, many investors are also seeking to achieve environmental and social impacts through their portfolios.

“We believe the best way to achieve both financial investment goals and these impact goals is through portfolio engineering that incorporates these objectives holistically, beginning with crisply defining an investor’s goals, systematically looking across a variety of asset classes to find assets that are aligned with these goals, and then combining those assets to create a portfolio that is designed to achieve a high ratio of return to risk,” Bridgewater stated in a 19-page white paper.

The All Weather Sustainability fund will use assets that are aligned with the United Nations’ 17 Sustainable Development Goals, adopted by all U.N. member states in 2015. “Whatever we invest in, we will determine how the security is aligned with the U.N. SDGs,” said Stendevad in a joint phone interview with Karniol-Tambour, stressing there are hundreds of sub goals. He said Bridgewater processes millions of sustainability data points — both from commercial and academic providers — and converts them in a way to understand sustainability. “We start with a fundamental understanding and then build a systematic process,” added Karniol-Tambour.

They estimate 25 percent to 30 percent of the securities in the Bridgewater universe are aligned with the U.N. SDGs. They include equities, government bonds and commodities.

“Determining asset alignment with the SDGs is an imperfect and difficult exercise,” Bridgewater acknowledged in the white paper. “There is not one optimal methodology. The SDGs differ in how measurable and relevant they are depending on the asset class or entity, and precisely quantifying the SDG alignment or measuring the impact of a given asset is complex.”

It stressed that global assessments require large-scale, multivariable analysis, and that the data quality and availability required for this analysis is imperfect. “No single viewpoint can provide a complete picture of an issuer’s SDG alignment,” it added. “This is a challenge that all investors with impact goals face, and we approach it humbly.”

Even so, Bridgewater asserted its fundamental, systematic, and diversified approach to investing provides the firm with an advantage. It explained its All Weather framework is based on two fundamental principles of asset pricing — assets outperform cash over time and assets have reliable biases to certain economic environments. “These economic biases are a logical result of the nature of an asset’s cash flows and what markets are expecting those cash flows to be worth,” Bridgewater added.

It did note the asset mix for this strategy is not the same as what it holds in its larger global All Weather strategy. “However, the way that these assets respond to economic fundamentals — i.e., their biases to certain economic environments — is the same,” it added.

Several years ago, Bridgewater started researching how it could offer solutions with goals beyond risk and return.

Meanwhile, over the past few years there has been a sharp increase in the number of investment firms developing various types of socially conscious investment funds at the same time many major corporations have been setting more stringent goals for carbon emissions and other social and environmental issues.

So far, the sustainability strategy is not exactly a major risk for Bridgewater. The $2 billion raised for the new fund is a statistically insignificant percentage of the firm’s total $150 billion in assets under management.