The integration of environmental, social and governance (ESG) factors into the investment process has become a primary objective of certain investors. According to the 2014 Trend Report on Sustainable and Responsible Investing Trends issued by the Forum for Sustainable and Responsible Investment (SIF), mutual funds, variable annuity funds, exchange-traded funds
and closed-end funds that incorporate ESG factors into the investment management process more than tripled in terms of assets under management from 2012 to 2014, accounting for $1.94 trillion in ESG assets in 2014. For a summary of an earlier trend report issued by SIF, see “More Hedge Funds Are Employing Environmental, Social and Governance Investment Criteria
” (Nov. 3, 2011). Despite the significant amount of assets being directed into investment strategies that incorporate ESG factors, the general industry consensus is that the adoption of formal ESG policies by hedge fund managers remains fairly uncommon and that private equity managers continue to be comparatively better positioned to do so. This article, the first in a two-part series, explores the development of ESG investing and its prevalence in the hedge fund space. The second article
will review advice from industry experts on considerations for managers wishing to develop an ESG investment policy, as well as the due diligence demands from investors seeking investment managers that incorporate ESG factors into the investment process.