Hedge Fund Adviser Sees ‘Potential’ for Exposing ESG Fakes

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Hedge fund managers will play a crucial role in figuring out who’s not living up to their environmental, social and governance promises, according to an adviser to the industry.

Petra Dismorr, chief executive officer of London-based NorthPeak Advisory, spends her time telling hedge funds and private equity firms in the U.S., Asia and London that ESG considerations are key to winning mandates in Europe. She also says hedge funds will ultimately have an edge when it comes to addressing a principle investor concern: policing companies that might not be as clean as they claim.

“It is hugely underestimated, the active role that hedge fund managers in particular can take,” Dismorr said in a phone interview. She says the “day-to-day interaction” that portfolio managers and analysts working for hedge funds have with the companies in which they invest represents “great potential” when it comes to exposing frauds.

Figuring out whether an investment is as sustainable as it purports is becoming a major investor concern. In the Nordic region, which is ahead of most others when it comes to ESG and where the per capita savings rate is among the world’s highest, cash-rich investors are growing increasingly anxious about the prospect of buying ESG products that end up being duds. Dismorr says lessons learned in the region will offer a roadmap for others.

A Hiring Spree?

Officials at Goldman Sachs Group Inc. predict that the spike in demand for sustainable assets will trigger a greater need for active management, which means more people watching over portfolios. The Wall Street firm is adding 40% to its Nordic headcount to service the region’s asset management industry.

Meanwhile, the ESG label is being slapped on a dizzying array of financial products, often much faster than investors are able to conduct the necessary due diligence before committing funds. In the U.S., the Securities and Exchange Commission recently warned that some money managers are promoting their funds as sustainable when they’re clearly not, potentially exposing them to legal risks.

In Europe, regulators are trying to enforce a more uniform taxonomy, but investors still face plenty of uncertainty when it comes to figuring out how sustainable securities really are.

At the same time, there’s a growing acceptance that investors who ignore the importance of ESG will lose money, as financial risk and climate risk start to overlap.

“The big challenge is the fact that there are a lot of so-called ESG experts coming to market, a lot of miss-selling of products that aren’t ESG,” said Dismorr, who previously worked for seven years at Citigroup Inc. where she assisted hedge fund clients.

The hedge-fund industry’s advantage is that it’s “extremely powerful” when it comes to leaning on corporations, she said. Examples include Barry Rosenstein’s Jana Partners LLC, Dismorr says, which three years ago teamed up with the California State Teachers’ Retirement System to get Apple Inc. to come up with ways to protect kids from excessive screen time. Apple added a feature to its devices to address the concerns.

Dismorr says PrimeStone Capital LLP, Trium Capital LLP and Jabre Capital Partners SA are among hedge fund clients that are currently engaged in a “very active dialogue” with portfolio companies about issues such as how they manage their carbon footprint and treat staff.

To get ahead, a lot of asset managers “are choosing to create their own bespoke ESG data monitoring filters,” Dismorr said. “A lot of the quant houses have been very much at the forefront of that.”

And in about five to 10 years, ESG will no longer be an extra element in investment strategies, according to Dismorr, but a no-brainer when it comes to chasing the highest returns.

©2021 Bloomberg L.P.

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