How can hedge fund managers utilise new technologies to support ESG initiatives?

When it comes to enriching customer experiences, modern technology plays an increasingly important role in allowing hedge fund managers to foster strong relationships and service clients.

One way that new technologies for hedge fund managers can facilitate an enhanced customer experience is by improving the standard of chief financial officer (CFO) data reporting with respect to ESG, strategic performance and risk management.

Providing chief executive officers (CEOs) with strategic recommendations remains a core element of a CFOs role, though the factors used to construct these recommendations have evolved significantly in recent years, leading to CFO’s responsibilities becoming even more closely linked to IT and HR functions.

The factors CFOs consider when making strategic decisions has pivoted to include ESG considerations, as clients begin to recognise how influential issues such as climate change, data privacy, and social injustice can be with regards to financial resilience and performance.

This is a direct response to global changes in consumer values, whereby issues of corporate social responsibility are now under more scrutiny than ever, and it is anticipated that this trend is here to stay.

From this, one clear question arises; how can hedge fund managers meet CFOs’ data reporting expectations in regard to ESG, strategic performance and risk management?

How Does Technology Help Hedge Fund Managers with ESG, Strategic Performance and Risk Management?

Technological innovation and improvements to efficiency are key to driving outperformance and satisfying client demands for hedge fund managers. Here are some of the new technologies that can help ESG hedge funds keep the environment in mind.

AI-Driven Alternative Data Set Analysis

When screening securities, hedge fund managers can improve their investment frameworks by leveraging artificial intelligence (AI) and machine learning (ML), in conjunction with unstructured or alternative data sets to gain a clear picture of changing sentiment in relation to ESG factors in real-time.

Automated back and middle office systems

It is part of human nature to occasionally make errors, such as attaching a wrong document or feeding data into a system incorrectly, which can result in inaccuracies in reporting and ultimately, client dissatisfaction.

Automated back and middle office systems can help to improve accuracy, efficiency and profitability by removing the need for manual intervention in many repetitive tasks. Organisations tend to leverage the power of AI and ML tools to achieve this.

Online Reporting Tools

This also allows for more flexible reporting to cater to the needs of increasingly sophisticated clients and meet stringent regulatory requirements. Data can easily be extracted for internal data management systems and inputted into various reports to give clients complete clarity and confidence in their investment decisions.

The Future of ESG Hedge Funds

At present, integrating ESG presents unique challenges for hedge funds, particularly in regards to multi-strategy, alternative risk premia, global macro, and certain relative value strategies. While there are many industries favouring eco-conscious investments, this highlights a need for improved technological processes, data, rolls, and instruments to overcome these challenges, which we can expect to emerge as the ESG megatrend becomes integrated more holistically across the entire hedge fund industry.

In-House ESG Data vs. Third Party ESG Data

Hedge funds are incorporating ESG data into their risk management processes.

Data is an integral pillar in building ESG portfolios and third-party sources can provide hedge funds with this information, but what limits the usefulness of such data is a lack of objective standardised metrics.

ESG research firms calculate scores for a variety of companies using a wide range of criteria to offer hedge fund managers a clear metric for comparing different investments.

Most ESG research firms typically consider things like annual reports, corporate sustainability initiatives, and resource management when constructing ESG metrics, however the specific factors and the weighting they are given varies from firm to firm which is why a company's score can vary depending on the research firm that provides the score.

Without a unified standard to rate companies’ ESG credentials, it is difficult to create a portfolio of funds as each manager reports on ESG factors subjectively. An alternative view on the subjectivity of each ESG rating is that this actually adds value, in that each data provider considers a different perspective and consults varying metrics to create an altogether more rounded view of ESG factors.

With the variance in ESG scores calculated by third parties, some hedge fund managers may instead opt to conduct all of their analysis in-house. This presents three main operational challenges, which must be addressed on top of the manager’s existing core responsibilities:

• Large quantities of complex data must be collected and analysed properly
• The analytical process must be scalable at will, when necessary
• The fund must have the capacity to adapt to rapidly changing requirements

Facing each of these challenges involves significant amounts of time and money, and any inaccuracies within the data reports can have a detrimental impact on the reputation of the hedge fund manager.

Presenting inaccurate data can also bring accusations of greenwashing, a term which in the context of investment, refers to the misrepresentation or manipulation of an investment product in order to make it appear more sustainable than it is in reality.