Numerous hedge funds pursuing ESG strategies are constraining themselves, warns Man GLG

16 May, 2012

Too many hedge funds attempting to pursue ESG (Environmental, Social, Governance) investment strategies are focussing excessively on clean-tech, the portfolio manager of Man GLG’s sustainability strategy has warned.

“Hedge funds first entered the ESG space through clean-tech strategies but found limited opportunities given its dependency on regulatory regimes, volatile investment cycles and a universe of illiquid, small-capitalised companies.  It has created a lot of attrition and stigmatised the space to some degree,” said Jason Mitchell of Man GLG.

Defining and applying an ESG strategy is inherently subjective, as Mitchell acknowledged. “Approaches express either the asset owner or asset manager’s hierarchy of normative and material preferences.  It requires a lot of thought to identify an opportunity set within sustainability. Purist approaches often carry contradictions.  Take renewable energy such as solar or electric car batteries. It could be argued that government subsidisation in renewable energy—Spain’s tariff deficit being the most recent example—is now undermining investment in areas like education or healthcare. So defining sustainability and then applying ESG is very difficult,” he said.

There is also some investor disquiet, particularly among public sector pension funds, about whether shorting is reconcilable with ESG strategies. Mitchell issued a blunt retort. “If an investor takes the view that shorting is immoral, hedge funds are not for them regardless of ESG.  If we can show that ESG can be an effective signal not only to mitigate risks but also identify and reinforce longer-term structural problems, especially around governance, I think investors will be receptive,” he said.

“I would love to think that ethical shorting is possible– for example, be short a tobacco index and long healthcare—but these binaries have not historically performed given that the fundamental drivers and regulation for healthcare are very different from tobacco.  They also present enormous risk asymmetries.  Markets are more dysfunctional than that. It is important to have a pragmatic approach to shorting. Just because a company makes solar panels doesn’t mean it is necessarily well managed. It could have poor transparency or governance issues, which would contribute towards an example of an unsustainable business,” he highlighted.

Man GLG became one of the 988 signatories to the UN PRI (Principles for Responsible Investment) in January 2012. The UN PRI is a framework designed to encourage sustainable investing by incorporating ESG into investment decision making and ownership practices.


Written by Owen Dickson