A survey of 53 hedge funds with over half a trillion US dollars in combined assets under management has found that 40% of the funds currently incorporate environmental, social and governance (ESG) considerations in their investment process and that they will reach a tipping point no later than 2022 when a majority of them will do so.

The survey, conducted by BNP Paribas corporate and institutional banking, predicts that 57% of surveyed funds will be incorporating ESG by mid-2022 or earlier. This momentum is driven by market dynamics – client demand (71%) and investor requirements (67%). Consequently, a variety of ESG investment styles have been added to traditional hedge fund strategies.

However, some of the 60% of funds surveyed that do not currently integrate ESG remain sceptical that ESG-related products and datasets can improve risk-returns and question whether they can be successfully combined into existing hedge fund investment strategies.

Of the surveyed funds integrating ESG, only 48% are driven by the belief that it will improve their risk-return profile, while 67% of them cite social factors as the most difficult to analyse and incorporate. There was also an ‘action gap’ between the familiarity of sustainable products and uptake.

Still, hedge funds are becoming increasingly aware of their responsibilities to the environment and society. Currently 55% of all respondents use ESG principles in the management of their companies driven by firm leadership, and 62% are measuring their operational carbon footprint.

Over 50% of respondents believe there will be increased demand for ESG-integrated investments post-Covid-19. Furthermore, 85% of funds integrating ESG expect more regulatory disclosure requirements in the next year, with the majority taking a greater role in ESG consultations.

Social factors and data remain the current challenges as one in five hedge funds do not integrate ESG due to lack of data.

Sandrine Ferdane, BNP Paribas’s global head of financial institutions coverage, points out: “As we have seen across the investment landscape, hedge funds are evolving to integrate ESG into their decision-making.”