BNP Paribas Asset Management recently launched a long-short strategy aimed at companies related to the energy transition. Portfolio manager Edward Lees (photo) explains how the fund is putting pressure on non-sustainable companies and thus achieve a positive impact on the energy transition.
The BNP Paribas Environmental Absolute Return Thematic Equity (EARTH) is a long/short addition to the BNP Paribas Energy Transition Fund which was launched in October last year.
Research by KPMG earlier this year showed that hedge funds are taking steps when it comes to responsible investment, but that no more than 15% have actually integrated ESG factors into the strategy.
Hedge funds indeed are laggards in terms of integrating ESG-criteria in their investment process. This is partly because the market for hedge funds is rather fragmented. ‘As a consequence, ESG as a phenomenon is less top-down in the hedge funds industry,› says Lees.
Long in the good, short in the bad
According to Lees it is not necessarily more difficult to integrate ESG-criteria for hedge fund managers. ‹You can go long in good ESG companies and short in bad ones. That’s easy,› he says. However, he does think that in some respects long-only funds are better equipped to integrate ESG criteria into the investment process.
‘These funds are usually run by large asset managers, which have a lot of associated resources. BNP Paribas Asset Management is an example of this. Hedge funds, on the other hand, are freer to put their beliefs in practice, as they are able to go short as well as long›.
Lees notes that investors increasingly become aware improving on ESG can improve a fund’s alpha potential. He adds, however, that greenwashing remains a serious challenge. ‘Within our strategy, we constantly ask ourselves the question: how does this help the world?’, he says.
Not a pure ESG strategy
Yet the BNP Paribas Environmental Absolute Return Thematic Equity (EARTH) strategy is not a pure ESG strategy either, Lees admits. ‘What distinguishes us from an ESG-fund is that we do not focus on the S and the G. We really only focus on the Ecological aspects, because that is where we believe there are the most and best opportunities. In addition, we don’t use ESG-ratings in our investment decisions. However, we do use our company-wide ESG framework as a quality control when selecting stocks›, he adds.
Since its launch in October last year, the young fund has achieved a return of more than 40%. According to Morningstar analyst Ronald Van Genderen, this is the result of very successful stock selection: ‹Several top-10 positions have doubled in price, such as Plug Power, Sunrun, Enphase Energy, SolarEdge Technologies and Bloom Energy,’ he says.
Yet, there is also a lot of interest from investors in the new fund. ‘This mostly comes from institutional investors at the moment, but we expect wholesale to follow,’ says Lees.
Reputation
Could an increasing focus on ESG perhaps help hedge funds to get rid of their bad reputation? ‘This won’t be easy,’ says Lees. ‘Certainly in Europe it will be difficult. But the point is that hedge funds are needed for a healthy functioning capital market. Hedge funds do not create problems, they expose them and as such contribute to healthy capital markets. However, it is important for managers to stick to their mandate and to be able to demonstrate this.’