Hedge fund Marshall Wace plans to raise $1 billion for a new fund that will invest in stocks with strong environmental, sustainability and governance (ESG) ratings while betting against stocks with poor ratings, according to a source familiar with the matter.
The London-based firm’s new strategy is the latest sign that investors increasingly believe markets will punish companies that aren’t environmentally or ethically conscious while rewarding those that are. Last year net flows into sustainable funds available to US investors totaled $20.6 billion, nearly four times the net inflows of 2018, according to financial data provider Morningstar. Inflows into sustainable funds in Europe were even higher, topping €120 billion or twice that from 2018, according to a separate Morningstar analysis.
Investors could be taking their cues from governments’ and corporations’ growing focus on curbing emissions of planet-warming greenhouse gases, a focus that has only intensified this year. Contrary to expectations a few months ago, many countries are responding to the economic shock of Covid-19 not by shedding climate obligations but by doubling down on them. Europe has arguably gone furthest, last month unveiling a plan to raise €750 billion on capital markets for long-term climate investments.
Investors are paying attention. A poll earlier this week by JP Morgan of 50 global institutions with $12.9 trillion under management found that 71% of respondents felt the economic shock of Covid-19 would increase awareness and actions globally to tackle climate change and “high impact, high probability” events like it. “Over the long run, COVID-19 could prove to be a major turning point for ESG investing,” said Jean-Xavier Hecker and Hugo Dubourg, co-heads of ESG and Sustainability at JP Morgan.
Critics have long alleged that ESG funds can’t beat comparable rival funds that only make conventional investments. But financial data increasingly shows that sustainable funds are more resilient to market downturns than conventional funds and often deliver better overall returns.
At least some prominent critics are in the Trump administration. According to news site Axios, a new Labor Department rule would effectively bar administrators of pension plans from offering an ESG default option in 401(k) plans while discouraging any ESG options at all.
Marshall Wace was co-founded in 1997 by British financiers Paul Marshall and Ian Wace. The firm bills itself as one of the world’s largest alternative asset managers and employs over 240 employees in London, New York and Hong Kong, according to its website.
Alternative asset managers typically invest in assets that other large firms don’t, such as private equity, venture capital or distressed debt, which may be more difficult to buy and sell quickly because the market is not as liquid — that is, buyers and sellers are not as readily available as they are for more common investments, such as the public stocks of large companies like Boeing BA or Pfizer PFE .
