The environmental, social, and corporate governance (ESG) movement has forced big finance to recalibrate priorities around impact investing in the past few years. Hedge funds, one of the last to the ESG party, have recently also started incorporating ESG and impact considerations into their decision-making process for new ventures. According to Morningstar, a financial services company based in Chicago, this shift led to investors pouring close to $21 billion into ESG-focused funds in 2019, a number that represented a 400% year-on-year increase.
In 2020, the net inflows into sustainable funds increased to over $50 billion, the financial services company revealed in a report published earlier this year. Another statistic highlighted by Morningstar to capture the impact of ESG-focused funds on the market was the overall net flows into stocks and mutual funds in the United States last year, with one-fourth of the total net flows accounted for by sustainable funds. Some of the biggest funds that are part of this process and their top holdings are discussed in detail below.
These top holdings include Alphabet Inc. (NASDAQ: GOOG), Citigroup Inc. (NYSE: C), and Cisco Systems, Inc. (NASDAQ: CSCO), among others. The business world is also starting to warm up to ESG and impact investing, partly because it is becoming harder to attract investors without responsible practices while also maintaining a business that does not care for the environment. According to a survey by BAML, 90% of bankruptcies in the S&P 500 between 2005-2015 were of companies with poor ESG scores five years prior to the bankruptcies.
The market tilt towards ESG and the importance placed on making environmental concerns central to the working of large corporations is reflected in the recent struggle for board seats at Exxon Mobil Corporation (NYSE: XOM), the Texas-based energy firm with a market cap of over $255 billion. On May 27, news publication Bloomberg reported that Engine No. 1 LLC, a small hedge fund with just over $250 million in assets under management and a 0.02% stake in the energy giant, had won at least two board seats at Exxon Mobil Corporation (NYSE: XOM).
The seats were won at an annual shareholder meeting held in late May. Engine No. 1 LLC has pledged to diversify the oil company and incorporate ESG practices into governance, which many believe are long overdue at Exxon Mobil Corporation (NYSE: XOM). The news publication also claimed that the hedge fund won the board seats with backing from some of the most powerful investors, including BlackRock Inc, an asset manager based in New York that is considered one of the top institutional investors in the world.
There has also been increased pressure on hedge funds from clients who want exposure to ESG and impact investing. A survey by Preqin, a capital market company based in London, reveals that more than 60% of institutional investors believe that ESG will become even more integral to the finance industry in the coming years and months. However, an overwhelming majority of the survey respondents still do not believe that it is necessary for hedge fund managers to deliver regular ESG reporting.
ESG and impact investing could provide a possible path forward for big finance that has otherwise struggled in the face of shifting market dynamics. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context in mind, here is our list of the 10 top hedge funds focusing on ESG and impact investing. These were ranked keeping in mind the investment portfolio, manager profile, and the top holdings of each fund in line with relevance to the ESG movement and impact investing