The start of July saw Marshall Wace, one of Europe’s leading hedge funds, announce its intention to raise $1bn for a new fund that is focused on stocks with strong Environmental, Social, and Governance (ESG) characteristics; while betting against stocks with poor ESG ratings. This is pursuant to their notion that a strong, positive societal impact of firms is indicative of their strong, future financial presence.
Until recently, active managers have mobilized to meet the demands for ESG, while hedge funds have stayed silent on the matter; regardless of the fact that 90% of firms that went bankrupt in the S&P 500 between 2005 and 2015, had poor ESG scores. Despite this noticeable trend, Marshall Wace are the first to announce a hedge fund directly related to ESG.
This is following their earlier move to filter out stocks relating to the adult entertainment, tobacco, and gambling industries. A dismissal of these industries is illustrative of the ‘clean’ image the hedge fund may be trying to achieve, along with an increased focus on sustainability – a focus that the current Covid-19 pandemic seems to have accelerated. People looking to invest will have an increased interest in the ESG characteristics of a firm, as evidenced by a study which suggests that 85% of individual investors have an interest in ESG.
Even prior to the advent of the pandemic, the investors’ ability to push through financial disasters was at the forefront of their priorities. Passive investors have also begun to adapt to fill this jump in demand; this is illustrated by a JP Morgan poll which revealed that 70% of investors (of the 50 global financial institutions polled) were of the opinion that the post Covid-19 financial world will see increased awareness and action regarding climate change and related environmental issues.
Are we likely to see other hedge funds follow in the footsteps of Marshall Wace? In my opinion, this shift into ESG by hedge fund managers is long overdue. With an increase in client demand for sustainable products and services, it is only a matter of course that hedge funds also adapt to fit the needs of their clientele. With little change in hedge fund investments over the past decade, a movement into ESG is a large shift in focus. It is becoming increasingly obvious that markets will penalize companies that fail to prioritize global sustainability. Therefore, investing in these stocks should, in theory, lead to larger gains in the coming years.
Although Marshall Wace are among the first firms to announce a green hedge fund, other managers have been doing their part to promote the movement of firms’ towards ESG characteristics. Chris Hohn, manager of over $30bn in assets, has put increasing pressure on firms to improve their ways. Hohn does this in an emphatic manner, by threatening to dump stocks or oust boards if firms do not significantly reduce their carbon footprint. As manager of the most profitable hedge fund last year, Hohn is leading the way with respect to both profits and pushing for better environmental action. Hopefully, his outspoken nature will continue to push an industry, which has failed to act for a number of years, in the right direction.
The 2020s look set to see a shift in the focus of ESG firms from niche corners of the market or specialist investors, into the mainstream investment sphere.
Written 24 July 2020