Less than half of hedge fund managers — 41% — said they consider environmental, social and governance factors in stock selection, in response to a survey conducted by hedge fund index provider BarclayHedge.
Among hedge fund managers currently using ESG to pick stocks, an average of 52% of their assets are allocated based on ESG ratings, compared to 42% a year earlier.
Next year, an average of 58% of stocks are expected to be chosen using ESG measures, survey results showed.
About 62% of hedge fund managers said they use ESG ratings to screen stocks for both long and short positions within their portfolios with the balance using ESG only to find candidate companies for the long portion of their portfolios.
Of the three elements of ESG, hedge fund managers overwhelming rely on the governance factor in stock selection, with 61% using that factor in identifying short-position candidates vs. 56% for long bets.
Among the 70 hedge fund managers who were surveyed June 12 to July 11, the preferred providers of ESG ratings were Bloomberg and Sustainanalytics, with 33% each; MSCI with 21%; and Thomson Reuters at 13%.
Several factors are driving hedge fund managers to utilize ESG measures in their portfolio investments, said Sol Waksman, president of BarclayHedge, in a news release accompanying the firm's quarterly survey.
One trend "is an increased interest among managers in social impact investing. There's also a growing recognition of the link between governance and performance," Mr. Waksman said, adding, "The growing awareness of how human activity causes climate change has led investors to place greater importance on trying to reduce the impacts of the most egregious activities."