[ M A R K E T
R E V I E W
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E S G ]
I
n August 2018, Credit Suisse published its mid-year survey
of hedge fund investor sentiment. For the first time, ESG
makes an appearance in the list of top 10 strategy preferenc-
es, coming in at number nine, ahead of fixed income arbitrage.
According to the survey, 25% of investors now have an ESG
allocation.
Some observers put the level of engagement with ESG even
higher. Charlie Day, global head of equity prime brokerage,
Societe Generale, points to a recent survey by the Alternative
Investment Management Association (AIMA) and CAIS Cayman
Alternative Investment Summit (CAIS) of 80 asset managers
with $550 billion of assets under management. “Of these, around
40% of respondents said they are already investing using re-
sponsible investment principles, with total assets in responsible
investment worth $59 billion, just over 10% of the respondents
combined AuM,” says Day.
In the same survey, 36% of respondents said they either had or
“Other than the general thinking that ESG is good, there
is no real commonality as to what ESG criteria are top of
[clients’] list of priorities.”
MARK MOBIUS, FOUNDER, MOBIUS CAPITAL PARTNERS
planned to sign up to the United Nations Principles for Respon-
sible Investing (UNPRI). “Perhaps the strongest indicator is
the commitment of human capital,” says Day. “Almost a third
of respondents said they had or planned to hire a responsible
investment expert in the next 12 months.”
In some cases, regulators can act as a catalyst. “Many Canadian
institutional investors are considering the broader implications
of ESG factors in their investment activities,” says Michael Gar-
neau, vice president, relationship management, Eastern Canada,
CIBC Mellon. In particular, he notes, “ESG-related pension reg-
ulation in Canada’s largest jurisdiction is also bringing height-
ened attention to these criteria.”
According to a guidance document released by the Financial
Services Commission of Ontario (FSCO), a pension plan admin-
istrator is required to disclose in its statement of investment
policies and procedures (SIPP) whether it has incorporated ESG
factors into the plan’s investment policies and procedures and, if
so, how the administrator has incorporated them. When an ad-
ministrator decides not to incorporate such factors into its SIPP,
this would also need to be disclosed.
Cigarettes, gaming and armaments
ESG nevertheless remains a broad umbrella with different
managers focusing on their own selection of ESG criteria.
“Other than the general thinking that ESG is good, there is no
real commonality as to what ESG criteria are top of [clients’]
list of priorities,” says Mark Mobius, founder of Mobius Capital
Partners, whose focus is ESG investment in emerging markets.
“Some clients, for example, want a complete banning of anything
related to fossil fuels (including oil), cigarettes, gaming and
armaments while others are not as strict,” he notes. “Also, in the
44
Global Custodian
The Hedge Fund Annual 2018
corporate governance area, there are wide
differences on what should be done with
regard to the number of independent
directors, and, more importantly, what
the definition of ‘independent’ is.” Day
agrees: “There are current inconsistencies
in the criteria used to identify economic
activities that qualify as environmentally
sustainable, making comparison difficult,”
he says.
For Scott Coey, managing director, head
of EMEA relationship development -
hedge funds and structured products at
BNY Mellon, the selection of ESG criteria
often depends on the size of the firm.
“Smaller funds with limited resources
to apply to validation are likely to go to
investors and ask what factors matter
to them,” he says. “Larger hedge funds
launching their own ESG funds will tend
to incorporate a broad range of ESG
factors.”
Initiatives to promote standardisation
in the ESG criteria adopted are multiple.
Coey notes that a large number of finan-
cial institutions have signed up to UNPRI,
described by the UN as “a voluntary and
aspirational set of investment principles
that offer a menu of possible actions for
incorporating ESG issues into invest-
ment practice.” Signatories may be asset
owners, investment managers and service
providers and Coey sees the engagement
of hedge funds in ESG as partly a result of
a greater allocation to hedge funds from
mainstream asset owners.
“Larger hedge funds
launching their own
ESG funds will tend to
incorporate a broad range
of ESG factors.”
SCOTT COEY, MANAGING DIRECTOR,
HEAD OF EMEA RELATIONSHIP
DEVELOPMENT - HEDGE FUNDS AND
STRUCTURED PRODUCTS, BNY MELLON
A call fo