Investing with an eye toward Environmental, Social and Governance (ESG) considerations has been gaining traction across a broad spectrum of investors. It should come as no surprise then, that more investors are placing a greater emphasis on ESG in their hedge fund (HF) allocations.

In the most recent survey of such investors by our Strategic Consulting team, 22% of respondents indicated that they are placing a high priority on ESG in their hedge fund allocation decisions –– more than double the year prior. A full 40% of investors in Europe, the Middle East and Africa are looking to integrate ESG into their hedge fund holdings, while Private Banks and Funds of Hedge Funds (FoHFs) were at least twice as likely as institutional investors to focus on ESG. Notably, investors with higher assets under management tend to prioritise ESG products when allocating to hedge funds.

While it’s unclear whether ESG is a primary driver in manager selection, or one of many deciding factors, survey results suggest that ESG is material in investors’ decision processes. Investors appear to recognise that hedge funds that incorporate ESG in their strategies have the potential to move the needle –– both in terms of returns and corporate behavior –– through activism, proprietary screens, long-short strategies, and other levers that may be less prominent in traditional portfolios.

In this 3 Point Perspective, we look at what’s behind the trend and what it means for hedge fund managers and investors.