Hedge Funds’ Top Clients Step Up Demands for ESG Strategies

(Bloomberg) -- Hedge funds are having to shift gears as a growing number of their biggest clients want more investment strategies that target environmental, social and governance goals.

In Scandinavia, where pension investors are arguably ahead of the rest when it comes to ESG, hedge funds vying for their business are under pressure to step up their game.

“We have seen an accelerating trend of our institutional investors requesting more granular information about how we implement sustainability,” Erik Eidolf, the chief executive of Stockholm-based hedge fund Nordkinn Asset Management, said in an email.

Much of the change in focus is driven by regulators such as the European Insurance and Occupational Pensions Authority, which is behind a palpable shift “over the past two years or so in particular,” he said. But a lot of it is just part of a broad change in culture that’s not going away, according to Eidolf.

The Nordkinn CEO acknowledges that ESG has turned into a mainstream investment approach that no asset manager can afford to ignore. And any misgivings managers once had that ESG isn’t aligned with their fiduciary duty to chase the best return is now out the window, he said.

Today, the concept of sustainability “goes hand in hand with the long-term interests of asset owners, vis-a-vis their fiduciaries,” Eidolf said.

“For us it is critical to be consistent in our approach to ESG, as all our efforts must be specifically relevant for us, i.e. adding concrete value for Nordkinn, our fund and thereby by extension the investors in our fund.”

What’s in a Name?

But as the hedge fund industry tries to beef up its ESG credentials, there’s a concern that a lack of standardization is making room for so-called greenwashing, whereby issuers make claims about emissions that don’t always stand up to closer scrutiny.

In a recent report, the Bank for International Settlements cautioned that companies issuing green debt aren’t necessarily cutting their carbon emissions, underscoring the need for ESG ratings.

EIOPA has thrown its weight behind demands for better ESG reporting, including transparency around the long-term impact of investment decisions. And the European Union is in the process of rolling out a taxonomy to help bring more transparency and eliminate greenwashing.

Wollert Hvide, managing director at Sector Asset Management in Oslo, says he’s seen “an increased focus on ESG the last year” from clients, and that he and his team “expect this trend to continue.” Under its current strategy, sector focuses on “ESG factors that are material,” he said.

But hedge funds are behind other corners of the asset management universe when it comes to designing ESG strategies.

According to Anette Hjerto, head of absolute return investments at DNB ASA in Oslo, sustainable investing “isn’t as developed” among hedge funds yet as it is with “long only funds.” She says that’s changing.

“A lot of things are happening within that space,” she said. “It’s a market that is under development.”

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