The integration of ESG factors into the investment process continues to accelerate rapidly. Whilst traditional investor segments of the industry have made strides in the adoption of ESG factors into their investment frameworks, the study assess how hedge funds are responding to the shift across their diverse spectrum of investment strategies.
BNP Paribas' new research report looks at ESG integration within the hedge fund industry.
"By mid-2022 the majority of hedge funds will be integrating ESG approaches."
The survey – which included 53 hedge funds with a combined AUM of over half a trillion USD – found that 40% currently include ESG considerations in their investment process, while 60% do not. Interestingly, the survey found that the imbalance is not simply a matter of hedge funds being unconvinced about the business case of integrating ESG for a sustainable future, but that there are key barriers that have delayed integration. For example, 67% of respondents cited social factors as the most difficult to analyse and incorporate. There was also an 'action gap' between the familiarity of sustainable products and uptake.
In spite of this, a key finding of the report is that hedge funds are approaching the tipping point of ESG integration. Whilst the majority of funds surveyed do not currently integrate ESG, most of those who do only started integrating ESG since 2018. On this trajectory, by mid-2022 the majority of hedge funds will be integrating ESG approaches – likely sooner.
The report also examines the key drivers behind current integration, such as client demand and a belief that ESG positively impacts risk-returns. Future drivers will also continue to shape the sector's response to ESG, such as the COVID-19 recovery and an evolving ESG regulatory landscape.
The ESG hedge fund survey is a further expansion of BNP Paribas research into ESG investing, and follows on from previous ESG asset management and owner surveys conducted in 2017 and 2019. Similar to the 2019 BNP Paribas ESG survey, this hedge fund study also found that social factors and data remain current challenges.
To build on the survey findings, the report presents a framework against which hedge funds map their current approach to ESG across three pillars.