The rise of Environmental, Social, and Governance (ESG) considerations in finance has been meteoric, and South African hedge funds are no exception.  

To assess attitudes towards ESG integration and benchmark the South African hedge fund landscape against international standards, RisCura conducted a survey of South African hedge funds. This survey included insights from nine South African hedge fund managers, providing a localised perspective to supplement existing, primarily international data. 

The survey findings reveal a dramatic shift in attitudes, with a resounding 100% of respondents claiming to incorporate ESG factors into their investment decisions – a stark contrast to the 18% who did not factor in ESG just a few years earlier. An impressive 78% even consider ESG “very important.” These figures paint a picture of a sector fully embracing responsible investing. But is this enthusiasm translating into genuine action, or is it merely lip service to appease growing investor demand? 

The RisCura survey reveals a potential disconnect between stated intentions and actual practice. While hedge fund managers overwhelmingly report prioritising ESG, the data tells a different story. Surprisingly, short positions held by these funds boast higher average ESG ratings than their long positions. This counterintuitive finding raises serious questions about the depth and effectiveness of ESG integration. 

Key questions arising from the survey: 

• The “say-do” gap: Are hedge funds truly factoring ESG into their core investment strategies, or are they simply paying lip service to the concept? Are they highlighting ESG credentials to attract investors, without fundamentally changing their investment processes? 

• ESG rating adequacy: Are the ESG ratings themselves adequate or flawed? Do they truly capture the ESG risks and opportunities associated with the companies in their portfolios? Do inconsistencies in methodologies between rating agencies lead to misleading scores? 

• Governance Focus: The survey reveals a potential focus on governance over other ESG factors. While a majority of managers claim all pillars are “equally relevant,” the data suggests a possible emphasis on governance. Is a narrow focus on governance sufficient for truly responsible investing? Are environmental and social factors being adequately considered? 

Bridging the gap: what needs to happen? 

• Improved measurement of ESG effectiveness: Relying solely on ESG ratings may not be sufficient. More sophisticated metrics are needed, capturing the nuances of ESG integration and going beyond simple scores. This includes incorporating qualitative factors, such as a company’s culture, stakeholder engagement, and track record on environmental and social issues. 

• Transparency and standardisation: Clearer reporting guidelines are needed to ensure consistent disclosure of ESG practices. Standardised ESG frameworks would allow investors to compare funds more easily and assess the true level of ESG integration. This requires collaboration between regulators, industry bodies, and investors. 

• Investor pressure: Investors will be a key driver of change. They need to move beyond simply asking about ESG and start demanding concrete evidence of its integration. They need to ask tough questions about how ESG factors are incorporated into investment decisions, how ESG risks are managed, and how ESG performance is measured. 

Looking ahead 

Only then can we ensure that ESG in the South African hedge fund industry moves beyond lip service and becomes a genuine force for positive change. Download the full RisCura whitepaper for a deeper dive into the findings and analysis. 

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