PERSPECTIVES The adoption of ESG criteria among hedge fund and private assets managers: a survey by Unigestion April 2015 It is increasingly recognised that taking into account environmental, social and governance (ESG) criteria in investment processes can have a positive impact on a portfolio s risk-return profile, both through its ability to identify opportunities and to help avoid risks. As a signatory of the United Nations-supported Principles for Responsible Investment (UN PRI), at Unigestion we take our responsibilities as an investor very seriously, and consistently incorporate ESG criteria in our direct investments. We also invest in funds run by external managers, and it can be difficult to assess third parties approaches to ESG. With this in mind, in 2014 we sent the hedge fund and private assets managers we invest in a questionnaire to assess their approach to ESG as part of our regular due diligence process. This followed on from a similar questionnaire that we sent our hedge fund managers in 2011. Below we discuss some of the most interesting findings of our survey, how our hedge fund managers approach to ESG has evolved over the past three years, and our future plans in this field. Eric Cockshutt is the firm s Responsible Investment Coordinator Hedge funds Approach to ESG As the following charts show, hedge fund managers who take into account ESG criteria in their processes are in a minority, with 60% of the managers we questioned reluctant to do so. That said, the proportion of managers incorporating ESG criteria has increased significantly since our last survey three years ago, and the proportion of managers we consider to be leaders in this respect has more than quadrupled. Signatories of the UN PRI Similarly, most of the hedge fund managers we surveyed have not chosen to sign the UN PRI, which are designed to encourage investors to incorporate sustainability principles in their investment decision-making and ownership practices. But again, there has been considerable progress in this respect over the three years since our last survey, with 16% of hedge fund managers having done so up from just 4% in 2011. Summary 1. The adoption of ESG criteria is still at an early stage in the hedge fund universe, although there has been clear progress since our last survey three years ago 2. Managers of private assets are more advanced in this respect, as ESG policies are increasingly being considered as a driver of value creation among private equity investors. 3. Unigestion will conduct due diligence reports to determine the approaches our managers take to ESG every year and we will work closely alongside them to help them improve their ESG practices. Read more of our publications online: www.unigestion.com/publications/ Unigestion SA I 1/5
Approach to ESG by manager type: equity vs. tactical trading Of the managers that we surveyed, those running equity-related strategies (long-short equity and equity market-neutral) were more advanced in terms of their approach to ESG integration than tactical trading managers (global macro, CTA and commodities). This is unsurprising as trading equities provides many opportunities to incorporate ESG criteria in an investment process. Some of the managers we surveyed apply filters or analyse other ESG metrics to assess the risks of the companies they invest in, and most conduct proxy voting, which further improves their overall score. These actions are not, however, applicable in the tactical trading space. Nevertheless, there is still scope for such managers to consider ESG. For example, one of our commodity managers is a leader in several commodity roundtables and organisations promoting best practices within the commodity trading community. As the charts below show, there has been an overall improvement in ESG application for both kinds of managers over the past three years. those running equity-related strategies were more advanced in terms of their approach to ESG integration than tactical trading managers Read more of our publications online: www.unigestion.com/publications/ Unigestion SA I 2/5
Hedge fund location European hedge funds were more likely to show an interest in ESG criteria than the US firms in our study, although there has been much greater progress in this respect among US hedge funds over the past three years. Europe has historically been more aware of ESG concerns, mainly due to greater pressure by large institutional investors, so this result is not much of a surprise. The strong progress made by US managers over the past three years is harder to explain, and might simply be a bias of our buy list. We will be able to assess this when we carry out our study again in the coming year. With only two firms in our study, results from Asia were not statistically significant. Private assets Approach to ESG and signatories of the UN PRI Our survey suggests that private asset managers are more advanced in terms of integrating ESG criteria than hedge funds. Of the managers we surveyed, only 27% are reluctant to address ESG, while 18% are what we term leaders in this respect. Meanwhile, 27% have signed the UN PRI, which is a relatively high proportion to have done so. In comparison to a lighter version of the study we conducted last year, this figure is up 5 percentage points. private asset managers are more advanced in terms of integrating ESG criteria than hedge funds Approach to ESG by investment strategy Our results suggest that buyout managers place greater importance on ESG than venture & growth or special opportunities (such as turnaround, distressed debt and natural resources) managers. This can be in large part explained by the size of the companies in which those managers invest: buyout funds usually invest in larger, more established and more professionalised companies, and have the resources to implement ESG programmes. Read more of our publications online: www.unigestion.com/publications/ Unigestion SA I 3/5
Firm location and size The European managers in our survey were significantly more likely to place importance on ESG issues than those from the US or Asia. It seems that this reflects that Europe is a more mature and established market in terms of ESG issues. Generally speaking, European asset managers and institutional investors have been more sensitive to ESG issues and have pushed private asset managers to implement ESG programmes. Unsurprisingly, larger firms (primarily large buyout companies) tend to pay more attention to ESG concerns than smaller managers. Larger firms tend to be well organised and process-driven, to invest in well-established companies in their portfolios, and to have the necessary resources to put in place ESG programmes. They are also more likely to attract investment from large institutional investors such as pension funds and endowments, which in turn are likely to be pushing their managers to have ESG programmes in place. The European managers in our survey were significantly more likely to place importance on ESG issues than those from the US or Asia Read more of our publications online: www.unigestion.com/publications/ Unigestion SA I 4/5
Conclusion: progress has been made, but there s a long way to go The adoption of ESG criteria is still at an early stage in the hedge fund universe, although there has been some clear progress since our last survey three years ago. Private assets managers are more advanced in this respect, as ESG policies are increasingly being considered as a driver of value creation among private equity investors. We expect further progress over the coming years as the importance of ESG becomes more widely recognised among private assets and hedge fund managers, and also because of greater pressure on them from their investors. For our part, at Unigestion we will conduct these due diligence reports to determine our managers approaches to ESG every year and, where possible, we will work closely alongside them to help them improve their ESG practices. We will continue to integrate ESG scores in our private assets monitoring reports and our hedge fund due diligence questionnaires, and to improve our reporting on these matters to our clients. ESG policies are increasingly being considered as a driver of value creation among private equity investors Important Information This document has been prepared for your information only and must not be distributed, published, reproduced or disclosed by recipients to any other person. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. It constitutes neither investment advice nor an offer or solicitation to subscribe in the strategies or in the investment vehicles it refers to. The views expressed in this document do not purport to be a complete description of the securities, markets and developments referred to in it. To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks. Data and graphical information herein are for information only and may have been derived from third party sources. Unigestion takes reasonable steps to verify, but does not guarantee, the accuracy and completeness of this information. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. Unless otherwise stated, source is Unigestion. All information provided here is subject to change without notice. It should only be considered current as of the date of publication without regard to the date on which you may access the information. MKT-20150429-10 Read more of our publications online: www.unigestion.com/publications/ Unigestion SA I 5/5