Activist hedge funds are successfully pressing companies to reduce toxic chemical emissions and produce bigger stock returns as a result, according to research from business schools in the U.S. and China.
Companies targeted by hedge funds are more likely to shut down plants with higher toxic releases and invest more in green technology, said business school professors Yongqiang Chu of the University of North Carolina at Charlotte and Daxuan Zhao of Renmin University of China, in a recent paper. They found that hedge fund activism pushed companies to cut emissions of toxic chemicals by more than 40 percent at the firm level and by 20 percent at their plants.
“The difference of the results at the firm and plant levels suggests that firms may shut down or sell polluting plants after being targeted by hedge fund activism,” Chu and Zhao said in the paper. Hedge fund activists “gain from the positive stock market reactions to the decline in toxic emissions.”
Stronger performance may partly stem from urging companies to cut pollution in order to avoid enforcement actions or penalties, according to the paper. The authors suggested the success of hedge funds in reducing the release of toxic chemicals is one measure where their pursuit of shareholder gains may not come at the expense of society.
“Unfortunately, finance researchers have devoted very little attention to understanding the social impact of finance,” they wrote in the paper. “We focus on the environmental impact of finance because pollution not only affects the quality of life locally, but may also affect climate change globally.”
[II Deep Dive: UBS Plans Long-Short Fund With ESG Strategy]
Last month, the chief investment officer of UBS Group’s multistrategy hedge fund business told Institutional Investor that he was planning to launch a long-short fund to make bets tied to environmental, social, and governance criteria. Kevin Russell, CIO of UBS O’Connor, said his group was hiring an ESG team that would consider the carbon footprint of companies and regulatory reform when creating short positions.
When considering short positions, hedge fund managers give more weight to environmental factors than social criteria, according to a survey by BarclayHedge released in July.
Asset managers are increasingly seeking to analyze physical risks tied to climate change, including wild fires, hurricanes, and rising sea levels, Myriam Durand, global head of assessments at Moody’s Investors Service, said in an interview at the time. Moody’s had just announced the purchase of a majority stake in Four Twenty Seven, a provider of data, intelligence, and analysis related to physical climate risks.
