Alternative Managers Should Listen to Asset Owners and Increase Their Focus on Responsible Investment

Alternative managers should listen to asset owners and increase their focus on responsible investment
Research from Cerulli Associates and UN PRI shows that investors want products that achieve a targeted return while doing good for society and the environment.

March 2019, London. Cerulli Associates’ latest report, European Alternative Investments 2019: The Evolving Integration of ESG, shows that a growing pool of investors are demanding that alternative asset managers integrate environmental, social, and governance (ESG) considerations into their products. They want their investments to achieve returns while doing good for society and the environment.

Alternative managers need to have clear responsible investment (RI) policies, provide full ESG reporting, and employ staff dedicated to ESG. Costs and resource constraints are among the key challenges they face when integrating ESG considerations into their due diligence and monitoring. In addition, many asset owners need some help with implementing RI, so managers need to devote resources to assisting their clients in this area.

In researching the report, Cerulli partnered with the UN-supported Principles for Responsible Investment (PRI) to launch two unique global surveys, one of hedge fund managers and one of asset owners. The results of the hedge fund survey show that around 60% of European hedge fund manager respondents currently integrate ESG into their investment processes and around 40% have engagement and active ownership practices. Those figures show that there is still plenty of room for improvement.

“Manager size is important: large hedge fund managers are significantly more likely than small firms to have established RI policies,” says Justina Deveikyte, associate director in Cerulli’s European institutional research team and lead author of the report. “Our survey found that 62% of hedge fund managers with assets of more than €5 billion (US$5.7 billion) have well-documented, firm-wide RI policies, whereas only 29% of managers with assets of less than €5 billion have such policies.”

Cerulli also surveyed 40 European private banks as part of the research for the report and found that increasing client demand is the key factor in the growing importance of RI to such institutions. Some 45% of private bank respondents said that they believe in the merits of integrating ESG factors into the investment process; another 48% said that ESG integration can also provide risk mitigation.

The report notes that institutional investors often focus on carbon or climate change more than on other themes. In contrast, younger private individuals show significant interest in a broad range of responsible investing strategies, such as sustainable agriculture, ocean conservation, the effect of plastics on the environment, and higher education (support for high-potential students from underprivileged backgrounds). Private banks are responding to this demand by focusing on thematic funds or certain sectors; many are also developing their own proprietary funds that emphasize different aspects of the UN’s Sustainable Development Goals.

“A lot of things still need to be done before RI is fully mainstream,” says Deveikyte. “For example, the asset management industry needs to establish minimum ESG reporting standards and harmonize the scoring methodologies ESG data providers use. Alternative managers should seek to provide innovative RI integration practices and identify ESG factors that signal both risk and opportunity in value creation.”

This and several other new findings make up Cerulli Associates’ European Alternative Investments 2019 report.

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