The Evolving Landscape: ESG Integration in Hedge Fund Investments


In the investments landscape, risk components concern not only the financial aspect, but also the variagate change of dynamics going on in the world. The risks outside the investments scenario are incorporated in the ESG risks. The acronym represents 3 pillars: environmental, social and governance.

These 3 topics represent the main areas of development and risks that any institution, company, person has to consider in order to develop a strong and affordable strategy. 

In the financial contest, these areas on one hand serve as instruments to follow and promote a specific cause, and at the same time they are used as a vehicle to gain profits, following a market trend that leads to a strategy of investments.

It is important that every kind of asset that tends to include these risk areas have to do a deepened work and study the right weight of each element to incorporate in the asset.

Hedge Funds and ESG investments

ESG elements can be incorporated in investors portfolios with different tools:

Listed Equity ,Fixed income ,Credit ratings,  Private debt , Passive investment , Private equity, Hedge funds, Infrastructure , Real estate , Farmland , Forestry,  Thematic and impact investing, Stewardship.

Hedge Funds are actively managed funds that attempt to profit from broad market swings. In order to meet clients demands, Hedge Funds often incorporate ESG principles in their strategies. For hedge funds, the path to integration has started in some areas, but has yet to find wholesale adoption.

From a survey conducted by BNP PARIBAS, 40% of Hedge Funds include ESG formula in their strategy, while the other 60% still do not integrate it. 

Among the 40%, a  wide percentage, 67%, started including ESGs since 2018, while of the 60%, a 20% of funds are planning to begin incorporating it in the next two years.

An important differentiating factor is the size of the fund: larger funds typically incorporate ESG considerations into their portfolios. Larger funds easily meet client requirements and cater to a more diverse clientele, making it essential for them to diversify their strategies and offer a variety of products. They also possess greater resources to address the costs associated with integrating ESG factors.

Apart from a lack of resources, another reason for not entering the market could be low client demand. Actually, this is the primary driver for a fund to incorporate ESG elements. With a high demand for a particular type of investment, the supply curve tends to follow suit. In other words, if there is demand, a fund is more likely to adopt a different strategy to attract capital.

For some managers, a reason could also be a lack of evidence demonstrating that ESG factors improve the risk-return profile, as well as the suitability of asset classes and/or time horizon.

Why do many funds decide to incorporate ESG components? 

The primary reason for incorporating ESG elements into hedge investments is to meet client demands and cultivate a stable relationship with investors.

From these diverse approaches, we can delineate two broad categories on the ESG Spectrum:

  1. Profitable World-Shaping Strategies: These investments are accompanied by the intention to influence third-party decisions that impact environmental and social issues.
  2. Pure Alpha-Seeking Strategies: The sole purpose is to generate profit from the investment, without a second aim connected with Environmental, Social and Governance elements. These investments tend to integrate a ESG strategy solely to capitalize on market trends For instance, investing in green companies is driven by the anticipated high value of a company, completely disregarding the broader effects of the strategy on the market.

Hedge Funds: Investments strategies

The first step that a hedge should do is to integrate ESG issues in investing analysis in order to be able to apply filters to list of potential investments, based on investors’ preferences.

The next step is to combine attractive risk-return profiles with an intention to contribute to a specific environmental or social outcome. 

Usually, Hedge Funds tend to invest in Fixed Income, like distressed corporate bonds where the investment manager may have a stronger position to influence management strategy to improve ESG performance, or sovereign debt, since governance, social factors and environmental factors are elements incorporated  into credit rating models and valuations. In this field, the world of green bonds is expanding, with an increasing number of sovereign issuers, such as France and Ireland, and the German curve is poised to potentially evolve into the risk-free green benchmark.

Another key investment that Hedge Fund use is commodities market: investing in commodities can contribute to promoting developing standards and practices on the supply side.

Security indices represent another type of investment: some Hedge Fund use EGS indices trying to attempt to capture the benchmark to follow.

For this types of investments, Funds use different strategies:

  • Disinvestment, including public statements, filing resolutions and voting against re-elections of directors , is a strategy used to take position against a specific issue incorporated in ESG elements
  • Shorting is another type of strategy that Hedge Funds use to express the view that an entity is not adequately incorporating ESG factors.
  • Stock lending, the temporary transfer of shares by an investor to a borrower to return equivalent shares to the lender at an agreed time. This strategy transfers voting rights to the borrower.

It is crucial to remember that integration of ESG into investment decisions co-exist with existing processes, and its aim is to prosecute parallel purposes, mainly outside the financial context. 


In conclusion, ESG investments driven by Hedge Funds reflects a shifting landscape where responsible investing meets diverse market strategies. This dynamic interplay not only reflects the duality of ESG investments, serving both as a tool for societal impact and a means for profit generation, but also underscores the evolving role of Hedge Funds in directing this intersection. As markets continue to navigate these shades, the integration of ESG elements into investment strategies, especially within Hedge Funds, emerges as a critical element in shaping the future landscape of sustainable and purpose-driven investing.

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