“The problem is hedge funds tend to be much smaller in scale,” he said. “Because of that, the cost burden to the firm is proportionally higher. If a firm has multiple clients with different exclusion lists, it could add significantly to its legal, administrative costs and operational complexity.”
Steve Kennedy, the partner who leads Albourne’s ESG initiatives, said hedge funds can tackle the issue “from a lot of angles.”
“You can try not to own those companies, or you can only own the ones that are better on ESG factors and short the ones that are less so,” he said. “A great one is also to buy the cheap ones that aren’t as good but are on an improvement path. There’s no one size fits all.”
Albourne still has an optional questionnaire that hedge funds can choose whether to answer. The mandatory part comes when the firm is hired by an endowment or pension fund to conduct due diligence on a fund’s operational risks. This typically happens when a money manager is close to making an initial investment. A hedge fund can answer that it doesn’t have an ESG policy, but that will be reported back to the prospective investor.
Switzerland’s LGT Capital Partners AG is also dialing up the pressure. The almost $60 billion asset manager strongly encourages every hedge fund that wants its money to sign up to its managed-account platform, a sort of portal that allows it to monitor their positions daily.
The Big Short Question
It now has about 40 hedge funds on the platform, according to Managing Partner Werner von Baum. LGT assigns an ESG rating of 1 through 4 for each manager (with 1 being the best) and they’re required to adopt an exclusion list created by stewardship and risk-engagement specialist Sustainalytics, he said.
Where things break down somewhat, according to von Baum, is when it comes to short selling, or betting that a security will lose value.
“It’s fair to say a lot remains to be done,” he said. “There’s not yet a common understanding on how to interpret hedge funds’ short positions in terms of ESG.”
The Church of England is against both long and short bets on industries on its exclusion list because it believes that either way, it’s wrong to profit from those activities, Mason said. But Lindenbaum pointed out that by shorting a stock, you can help increase a company’s cost of capital.