Sustainable investment should not be the preserve of a long-term, buy and hold approach, as hedge funds have a role to play in executing environmental, social and governance (ESG) policies.
So says a paper on the matter by Pictet Asset Management, which has incorporated ESG into the investment processes and risk management of all its hedge fund strategies. The ability to go long and short can be advantageous, especially when challenging companies for poor governance.
Hedge funds have often been the first to identify governance problems that later became corporate scandals. They were among the first to see problems at energy giant Enron, uncover the suspicion of fraud at fintech Wirecard, and the accountancy fraud at retailer Steinhoff.
While the objective may have been short-term reward, active lobbying drove the problems into the public domain.
This can work just as well for ESG as it has for governance, says Pictet, with the ability to flush out those whose ESG credentials are little more than greenwashing.
In fact, the paper argues, some strategies may uncover ESG investments in unusual places, such as the oil sector. It gives the example of some European integrated oil companies that are more advanced in repositioning themselves towards a low carbon economy compared to many of their global peers.
Holding a short position may be more effective than an underweight one, argues Pictet. Hedge funds directly engage with management of companies they are shorting.
Uncovering governance red flags can be a trigger for a new short position. But it may also force a long position to be reassessed.
So, says the Pictet paper, rather than a strategy to take out profits quickly, hedge funds have a vital role to play in identifying sustainability in the pursuit of fully integrated ESG investments.