A higher proportion of long only than hedge fund assets are publicly branded as being run on ESG (Environmental, Social and Governance) criteria, but that might change in future. The UNPRI (Principles for Responsible Investment) has finally unveiled a new due diligence questionnaire (DDQ) covering ESG considerations. AIMA, which has developed a suite of DDQs for over 20 years, belonged to the 17-strong working group as did the Hedge Fund Standards Board (HFSB).
The HSFB addresses some concerns around the G in ESG, through its support for fund and manager governance policies on conflicts of interest and valuation policies; reports such as administrator NAV transparency reports, and risk aggregation formats such as Open Protocol Enabling Risk Aggregation. Beyond this, governance at investee companies, and the E and S, are also attracting more interest.
The impetus for the DDQ comes partly from institutional investors. Albourne Partners started examining ESG more closely in 2011, initially in response to interest from allocators in Northern Europe and Australasia. Albourne now reports growing concern from the US.
Man Group’s GLG was an early mover. The firm has run a sustainability fund since 2008, and has been involved with the UNPRI advisory board. Man GLG’s approach avoids both “black boxes” and potentially simplistic box-ticking. “As managers have different styles the aim is to educate them internally and let them adapt,” says COO Carol Ward. Indeed, no one size may fit all. Many in the industry believe that DIY research is needed to complement various rankings supplied by providers such as Sustainalytics, Trucost or TruValue Labs. Additional research is essential partly because there are gaps in providers’ coverage, particularly in emerging markets and China, where disclosure can also be less extensive.