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Investor demand driving hedge fund ESG incorporation

Hedge_mazeInstitutional investors are increasingly calling on their hedge fund managers to incorporate environmental, social and governance (ESG) criteria, a study has found.

Investors now see ESG investing as serving their own long-term interest as much as those of wider society, according to the research.

Over 80% of managers reported an increased interest in ESG-oriented funds over the last 12 months, while 72% said growing investor demand was a key driver behind why funds are making ESG-oriented decisions.

Anthony Cowell, head of asset management at KPMG in the Cayman Islands and co-author of the report, said: “In the hedge fund industry, ESG has gone from being a nice-to-have to a must-have.”

“The traditional risk-return equation is being rewritten to include ESG factors,” he said.

Around 45% of the 135 institutional investors surveyed now based their investments in ESG-based hedge funds because they “offer opportunities to generate alpha” as well as provide a defensive element to portfolios.

As it stands, just 15% of the surveyed hedge fund managers define themselves as at the “mature” stage of ESG implementation, while 44% is in the process of doing so and 31% is still raising awareness. Only 10% has made no ESG implementation to date.

Andrew Weir, KPMG Global Head of Asset Management, KPMG International, said: “Sustainability is set to reshape the ecosystem of capital markets and the behaviours of their participants. It requires mindset shifts from the way investing has been done historically. It will become a gold standard in investing.”

Other key drivers behind why funds are making ESG-oriented investments were alignment with corporate values (37%), and increasingly available evidence of the materiality of sustainability (35%).

The report was published by KPMG, the Alternative Investment Management Association, Chartered Alternative Investment Analyst Association and CREATE-Research.

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