Factors driving hedge fund interest in ESG

Transcript:

Jeff Benjamin [00:00:04] Hi, folks, my name is Jeff Benjamin, and this is Three Questions at InvestmentNews. Today we’re talking with Cliodhna Murphy, executive director for product development at MUFG Investor Services. And we’re talking about S.G. in the hedge fund space. How are you doing? Cliodhna.

Cliodhna Murphy [00:00:20] Good, Jeff. Delighted to be here.

Jeff Benjamin [00:00:22] Yeah, thanks for joining us. We’re hopefully going to we’re going to not stump you because I understand, you know, all things hedge funds and ESG. So let’s get rolling. All right. Can you tell us how hedge funds are becoming aware of the importance of ESG considerations, and is that altering their investment strategies at all?

Cliodhna Murphy [00:00:43] So awareness has increased significantly in the last two years and I think there’s really two drivers here. So from a regulatory pressure perspective and investor demand, so looking at regulatory pressure, initially, the EU is evolving rapidly in terms of the regulatory framework and SFDR, the sustainable finance disclosure regulation. Level one came into force on the 10th of March this year, which is very much a principles based approach, asking managers how they’re going to take into account sustainability risks, into their investment decisions and disclosing those on their website in the prospectus. But level two is where the fun really begins, because there’s going to be very, very technical standards that they need to adhere to and managers need to disclose. And similarly, in the US, we have the formation of the Climate and ESG Task Force. And also there was a recent S.E.C. alert which is really helping managers understand what good practice looks like. And then in terms of altering investment strategies, investors are looking for maybe more specifics with regard to their mandates. So specific investment guidelines or requirements, and let’s not forget the real significant opportunity here. So, for example, the OECD estimates that there’s going to be over six trillion required to meet the Paris agreement goals by 2030. So the opportunity is there for investing innovative companies and renewable energy. It is absolutely huge,.

Jeff Benjamin [00:02:15] Are  hedge funds in any way uniquely capable of having an impact when it comes to ESG investing?

Cliodhna Murphy [00:02:21] Oh, absolutely. Absolutely. I mean, I think looking at the recent Net Zero Asset Managers Initiative, where we have already over a third of assets under, assets under management that have signed up. So that’s eighty seven signatures and thirty seven trillion. And that’s going to be very impactful in the transition to carbon net zero. Also looking at organizations like Share Action who are bringing together investors and hedge funds to really lobby CEOs and make specific change and look at what’s best practice. I think biodiversity is a very important one to touch on. Here the impact investors can have is huge and there’s a lot at stake. So at least one million plant and animal species are at risk of extinction, but also economically. Forty four trillion, according to the World Economic Forum, is linked to nature. So here it’s a very important area where investors need to become more impactful. And I think also on the biodiversity, when you think about the link to covid-19, it’s really going to move up investors radar

Jeff Benjamin [00:03:36] in the general hedge fund space. Is the pressure to adopt ESG strategies coming more from investors or from the asset managers or both?

Cliodhna Murphy [00:03:46] I mean, I think it definitely started out being much more driven by investors. Over time it’s become very collaborative between investors and managers. And I think the whole industry has really collaborated. It’s one of the most impressive areas of collaboration I’ve ever seen in the asset management community, including with regulators. For asset services such as ourselves, we see it as our mission to help bring that ESG transparency to both the public and private markets. And we’ve been very much engaged with investors and managers on that journey.

Jeff Benjamin [00:04:19] There you have it, folks. Cliodhna Murphy from MUFG Investor Services. Coolest first name ever. Thank you very much for joining us.

Cliodhna Murphy [00:04:29] Thanks so much, Jeff.