Responsible investment (RI) is among the most prominent themes in asset management today, both across the board and in the hedge fund sector specifically. According to Responsible Investment in Hedge Funds: The Growing Importance of Impact and Legacy”, a white paper produced by Cerulli Associates in partnership with the United Nations-supported Principles for Responsible Investment (UNPRI), hedge funds—and asset managers, more generally—have a role to play in countering the challenges the world faces by deploying capital wisely and in the best places.

The joint survey profiled hedge funds and asset owners globally to get a sense of where the hedge fund industry is positioned in terms of environmental, social, and governance (ESG) factors. In response to the survey, 21% of asset owners reported that integrating RI practices into hedge funds is very important today. When those same asset owners were asked about its importance in two years’ time, 46% indicated that it would be very important.

“Companies are increasingly judged on their environmental impact, not just their profitability,” states Justina Deveikyte, associate director of European institutional research at Cerulli. “Individuals are thinking about their legacy in terms of the climate and social issues, not just their finances. In light of this, the financial services sector has an opportunity to direct investors toward the types of places that they want to put their money.”

Increasing demands from asset owners for improved ESG reporting standards, as well as increased commitment to ESG integration and engagement, is driving hedge fund managers to define their position with regard to ESG. Asset owners emphasize the importance of including sophisticated ESG considerations in investment management agreements. They want greater transparency and expect managers to provide detailed explanations of how they integrate ESG considerations into their investment decisions.

“In time, the value of a business will be its impact on societal issues; asset owners recognize this, and hedge fund managers have a role to play in helping them make good choices,” says Deveikyte. “Companies must be part of the solution to challenges such as climate change and inequality. Hedge funds can help individual and institutional investors secure legacies that incorporate financial, climate, and social considerations—asset owners do not want to choose between these criteria and hedge funds can make sure they do not have to.”