ESG CHAPTER “WHILE ESG POLICIES WERE PREVIOUSLY A ‘NICE TO HAVE’ ADDITION FOR MANAGERS, TODAY MANAGERS MUST HAVE APPROPRIATE POLICIES AND PROGRAMMES IN PLACE FOR BOTH INVESTMENT AND BUSINESS PRACTICES.”
JAMIE KRAMER
W
HEAD OF THE ALTERNATIVE SOLUTIONS GROUP, JP MORGAN ASSET MANAGEMENT
e expect to see a continued growth in appetite, as hedge fund managers increasingly seek out the alpha associated with companies making sustainable transitions that are not yet priced in by the markets. Investors will continue to look for and encourage hedge fund managers to enhance their business practices through the development and improvement of Corporate Social Responsibility programmes, with a specific focus on diversity, equity, inclusion (DEI) and the environment. The traditional approach to ESG exclusions will likely not be enough for many investors, particularly those that question the merits of divestment and are increasingly looking to drive change via shareholder engagement and responsible stewardship. While ESG policies were previously a “nice to have” addition for managers, today they must have appropriate policies and programmes in place for both investment and business practices. On our platform, ESG policy adoption has increased to over 90 per cent, and we have a proprietary ESG integration framework by which we assess managers. For environmental factors, materiality
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varies across manager types (for example, sophisticated quant managers with heavy data usage are likely to have higher levels of energy consumption), while the relevance of climate-related risks to investment managers is generally quite low versus other types of companies. We view governance as being about having strong procedures, controls and oversight in place to monitor the business, including compliance programmes, audit timing, segregation of duties, valuation and cash movement. On social criteria, diversity is a focus and a top priority – we believe both diversity of talent and thought can help enhance investment returns. Over the past two years, we have met with nearly 100 diverse managers (nearly half have been run by women), to help broaden the platform’s impact on diversity in the hedge fund industry. We track diversity in our propriety database and 26 per cent of JPMAAM capital is invested in diverse managers. We require a diverse slate of candidates for all manager searches and have a 50 per cent diversity goal when investing in emerging managers. We believe the exponential growth in relevant data is the future of
ESG investing. This will increasingly come from both standardised data that issuers will be required to disclose, and the unstructured data that will increasingly reference ESG. As reporting becomes more standardised and data becomes more readily available, we should start to see a proliferation of sustainable offerings from macro, quant and multi-strategy hedge funds, in addition to the long only and long/short strategies we’re primarily seeing today. In Europe, we will start to see the effects of standardisation among regulatory bodies. SFDR is also laying the groundwork for how asset managers will apply sustainability in the US. Multiple markets in Asia are also implementing ESG reporting regulations for issuers and asset managers, particularly with regard to climate-related risks. We are already beginning to see this with the initiation of TCFD-aligned reporting standards in Singapore and Hong Kong. While ESG rules and regulations can help to provide guidelines for issuers and asset managers, without standardisation, there is potential for investor confusion.
HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022
