Zeroing in on ESG

COP26 served as an important reminder that we should be giving ESG more column inches. So going forwards, this will always have a place in The Hedge. 

Historically, the alternative space has not exactly built a reputation for being strong on the E, S or G. Times are however changing with managers aware that they need to adapt. This should be about aligning good works with good investments. Importantly the sharp end, who are the investors, from family offices to high-net-worth individuals, have really started to grasp the nettle. Many of their portfolios are still locked into their longer-term real assets, but there is a desire to change the more liquid aspects of their portfolios. Family offices by their very definition are there to maintain and build wealth for future generations. They fully understand that with no change to how we live our lives and invest, there will be no future generations. Importantly, helping to drive this is the pressure and influence brought to bear by influential institutional investors, such as the BlackRock’s of this world. 

The alternative space has not exactly built a reputation for being strong on the E, S or G

As the asset flow numbers show, there is significant investment heading into this space, which unsurprisingly is making its way to the big brands that have the strongest ESG credentials. This is not only mainstream investment management, but also names in the alternative space, such as TCI and Bridgewater. 

As things stand there are still too many hurdles and too many varying standards at play. Under a light regime, you can claim to be ESG compliant, which you will be, but under more rigorous criteria many funds do not stand up to scrutiny and the case for investing falls apart. Down the line there will undoubtedly be misselling problems and this will probably be the next big scandal. 

For investors, this world is too convoluted and is increasingly difficult to navigate - it is like a crypto investor trying to work out which of the 7,500 coins they should invest in. Ultimately, as an investor, you want to compare apples with apples. 

In my mind, the only way forward is to have centralised rules, definitions and regulations. These are fundamental to building a proper and usable framework, which investors know and trust. It is down to the regulators to combine their thinking and pull together a common set of standards that all managers can adhere to.