Hedge Funds Expect Large Jump in ESG Assets

Hedge funds expect to invest more than half of their assets next year based on environmental, social, and governance factors, a large jump from 2018, according to a survey by BarclayHedge. 

Fifty-eight percent of hedge fund assets will be tied to ESG criteria in 2019, rising from 42 percent last year, BarclayHedge found in a survey of hedge fund managers and commodity trading advisors globally. Governance was cited as by far the most important ESG factor, weighed for short bets as well as long positions. 

For example, a constant restatement of earnings is “a major blinking yellow light” for investors, Sol Waksman, president of BarclayHedge, said in a phone interview Wednesday. Shorting companies with poor governance and going long those with strong oversight is “a viable strategy,” he said.

According to the survey, social criteria were the second-most evaluated factors for hedge managers making long bets. Investors believe that companies are more likely to expand and retain talent when they treat employees well, according to Waksman.

Giving employees flexibility to work from home, offering equal pay for women, and having diverse teams are among the criteria considered, he said. 

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When considering short positions, hedge fund managers give more weight to environmental factors than social criteria, according to the survey. Asset managers are increasingly looking for ways to analyze physical risks tied to climate change, including wild fires, hurricanes, and rising sea levels, said Myriam Durand, global head of assessments at Moody’s Investors Service.  

These are “giant hazards,” Durand, who is based in Paris, said in a phone interview Wednesday. While European investors were earlier adopters of ESG, she said the investment area is growing faster in the U.S.

“We’re seeing climate change right in front of our eyes,” Waksman said.

Moody’s announced Wednesday that it had purchased a majority stake in Four Twenty Seven, a provider of data, intelligence, and analysis related to physical climate risks. The Berkley, California-based company scores physical risks linked to climate-related factors such as heat stress, extreme precipitation, and hurricanes. 

Four Twenty Seven quantifies climate risk exposures across asset classes, with data on more than 2,000 listed companies, 320 REITs, and 196 countries, according to the Moody’s announcement.