Finance
Hedge Funds / PRI

Bloomberg Brief ... Pensions are starting to judge hedge funds on ESG

Burgess COMMENTARY

Peter Burgess

Hedge Funds Pensions are starting to judge hedge funds on ESG

As many of the world’s biggest investors, including public pension funds, foundations, endowments, family offices, and sovereign wealth funds increase their focus on responsible investing, they are starting to ask whether hedge funds they invest in are incorporating sustainable strategies.

“When investors like us are looking at a hedge funds investment, we look at it from a perspective of what we are doing in responsible investing more broadly,” Marta Jankovic, sustainability and governance specialist at pension fund manager APG Asset Management said at panel discussion organized by the United Nations-supported Principles for Responsible Investment in New York June 12.

Governance issues are already a priority for activist and event-driven funds, and macro-style and long strategies are often cognizant of long-term environmental and social risks, Lukasz Pomorski, managing director and senior strategist in the global stock selection group at hedge fund AQR Capital Management said on the panel.

Yet, asset owners are now asking hedge funds to document their policies and approaches to responsible investment issues, particularly as public pension funds from Europe to California are facing government requirements on sustainability, such as avoiding coal, or needing to quantify the carbon emissions of their portfolios.

“There’s a need for disclosure,” Pomorski said. “Hedge funds already do a lot in responsible investing or ESG, but they might not call it that.”

The PRI released a due diligence questionnaire for hedge funds in May, aimed at making it easier for asset owners to identify how a hedge fund considers responsible investment. While standard due diligence questionnaires ask hedge funds about how they communicate with investors, its security policies or how many positions the fund ordinarily takes, the responsible investing questionnaire asks funds to explain proxy voting and corporate engagement policies and whether they measure the carbon footprint of their portfolio.

Pomorski said hedge funds are still questioning how to take advantage of sustainable strategies. “For hedge funds it’s an interesting question, because you may not want to go long carbon, but could you go short carbon?” he said.

Concerns about sustainability come as skeptical big-money clients have been stepping away from hedge funds, with investors pulling a total $70 billion from the funds in 2016, according to data provider HFR. Hedge fund managers may start to see more responsible investing questionnaires, as investors who have signed onto the PRI include about 345 asset owners around the world, such as Norges Bank, Dutch pension fund ABP and U.S. pension fund CalPERS. “This is an opportunity for hedge funds to change their culture,” Mariela Vargova, senior sustainability analyst at wealth adviser Rockefeller & Co., said during the panel.