30 JUN, 2023
As ESG is becoming a mainstream investing strategy, alternative managers must produce answers. Can the mainstream coexist with the alternative? Liquid alternative funds are not only often complex animals, they are also a broad church. Some alternative strategies aim to preserve capital and invest in individual securities in a single asset class. Others seek high returns by taking high risks using derivatives and invest across the whole asset-class spectrum. Being so diverse, alternative strategies differ widely in how they integrate ESG factors into their investment processes.
Morningstar’s latest report Can Alternatives go Green? looks at how existing alternative funds include ESG considerations, looking at the menu of products currently available to European investors and how the different ESG approaches work in the alternative arena. We also examine the unique issues to consider.
“ESG integration is still in its infancy within liquid alternative strategies. We count only a small but growing number of funds with sustainability goals. However, with regulatory advancements continuing to evolve, and increased interest from investors, varying degrees of ESG integration are becoming more and more common. Alternative ESG funds remain largely a European phenomenon.”Francesco Paganelli CFA, Senior Manager Research Analyst, Morningstar
Key takeaways include:
Morningstar identified 31 funds that use ESG factors as a central part of their strategy. These funds tend to be small, the majority having less than EUR 100 million of assets under management. They’re also young, few being older than three years. Totaling around EUR 4.3 billion in size, they represent only 3% of the alternative broad category group’s asset base. By comparison, sustainable strategies account for about 20% of European open-ended fund and ETF assets within equity, allocation, and fixed income. Meanwhile, about one in five liquid alternative funds employs exclusions, citing, for example, international agreements such as the United Nations Global Compact.
By Generali Investments