If not for the pandemic, ESG factors could have been a major trend in hedge fund and private equity investing this year, according to global advisory group EY. Alternatives managers have a way to go to satisfy investor interest in ESG.
The impact of the crisis on client relationships, felt more by private equity managers than hedge funds, hit growth prospects across the board. But, overall, the alternative fund industry rose to the occasion surrounding the pandemic in terms of investors’ expectations and managerial performance, EY says in a study published last week (November 14).
Following a survey for its 14th annual alternatives report (previously called the ‘Hedge Fund Report’), ‘In Times of Change, Does Accelerated Adaptation Present Obstacles or Opportunities?’ EY says alternative managers must determine a path forward for offering ESG products while better managing their internal ESG policies.
Allocators are increasingly focused on ESG products and socially responsible investing, but also wish to partner with managers who prioritise their ESG policies, the report says. Globally, 88 per cent of investors are regularly speaking with their fund managers on how ESG is incorporated into their investment-making decision.
With respect to the Asia Pacific region, investment trends and client engagement on ESG remain high but alternative funds have more work to do when it comes to resourcing for ESG at their organisation. Only 46 per cent of respondents in the region say they have a dedicated person responsible for managing ESG, which is well below the global industry tally of 80 per cent of managers with such dedicated people.
Elliott Shadforth, EY’s Asia Pacific wealth and asset management leader, said: “If not for the global pandemic, it’s possible that 2020 would have been remembered as the year that ESG dominated headlines within the business and economic environment.”
On the diversity and inclusion aspect of sustainability, which cuts across the S and the G, he said: “There are a number of reasons that diversity at alternative fund managers is critical, but investor behaviour and expectations are near the top of the list.
“Now is the time for alternative fund managers to step up and critically examine how they are thinking about talent attraction, development and retention to ensure a more diverse workforce. The experiences and knowledge from these individuals will prove to be fruitful in generating new ideas that ultimately benefit the manager and its investors.”
The survey results show that investments in ESG products almost doubled to 49 per cent of respondent investors during the past year. However, only 20 per cent of managers offered such products and 7 per cent had plans to do so – 73 per cent do not offer ESG products not do they plan to do so.
There is clearly a major disconnect between investors and the alternatives managers here. For instance, the proportion of institutional investors required to invest in ESG rose from 14 per cent to 26 per cent in the past year and the proportion which anticipated being required to so invest rose from 11 per cent to 19 per cent.
The survey covered 310 respondents, 237 of which were managers and 73 investors. Only three of the investors were domiciled in Asia, with 44 in North America and 26 in Europe. Private equity managers totalled 127 and hedge fund managers 110.