Voices: Hedge fund managers struggle to find useful data on ESG

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Asset managers are under increasing pressure to take ESG considerations into account when making investment decisions. That poses a particular challenge for hedge funds, which typically prefer to have as few limits as possible on what they can invest in. So it's no surprise that many of them are less than keen on participating in the revolution.

The Alternative Investment Management Association, a London-based lobby group representing hedge funds and other non-traditional fund managers, recently surveyed 80 of its members, with more than $550 billion of assets. As the chart above shows, there's a distinct lack of enthusiasm among funds with less than $1 billion of assets for introducing ESG as a constraint. Even among larger players, a 60% acceptance rate is no sign of unbridled passion for the topic.

The demands on fund managers to pay more attention to ESG are growing. As part of its drive to help implement the 2015 Paris Agreement on combating climate change, the European Union wants asset managers and other financial firms disclose how they account for sustainability risks when allocating capital. Meanwhile, the United Nations has proposed a due diligence questionnaire for hedge funds as it tries to enforce its so-called six principles for responsible investment. The UN says it wants to "better align investors with broader objectives of society."

The industry, as the AIMA survey shows, is lukewarm at best to the UN proposal.

For the smaller hedge-fund managers, the three biggest deterrents to ESG adoption were a lack of interest from financial intermediaries, the excessive costs involved, and concern about how much returns might be eroded by the practice.

And for hedge funds with more than $1 billion of assets, the AIMA survey showed an equal three-way split among respondents. They blamed a paucity of data, a lack of relevant corporate disclosure, and inadequate methodologies for assessing sustainability risks.

The lack of useful data may explain a second survey released this week that also highlighted a lack of interest in ESG. JPMorgan Chase surveyed as many as 270 investors attending its 16th Annual Macro Quantitative & Derivatives conference last month; a staggering 44% said they had no interest in the subject.

JPMorgan says the proportion of ESG naysayers is down from 54% when it posed the same question a year ago. But it still suggests that the quant crowd, which is by its nature even more data-driven then the rest of the investment gang, is justifiably concerned by the lack of objective statistics available.

A December study by consultancy firm EY showed that the percentage of respondents describing non-financial data from companies as inconsistent, unavailable or unverified had doubled since 2013, to 42%. While the number of providers of ESG statistics has proliferated, the lack of standardization of their output makes it problematic.

To my mind, that data gap is the biggest obstacle to ESG playing a mainstream role in steering investment decisions. Various bodies, including the Sustainability Accounting Standards Board and the Global Reporting Initiative, are attempting to tackle the problem. A solution, albeit an imperfect one, will undoubtedly be found.

But until the consistency of ESG data matches that of financial information across different geographical jurisdictions, asset managers — particularly smaller players unable to bear the increased cost — are justified in shunning ESG restrictions on they can and can't buy and sell.

Bloomberg News
Hedge funds ESG Quants Data mining Asset managers Financial regulations Risk tolerance JPMorgan Chase EY SASB Money Management Executive