Covalis Capital, an investment firm, is planning to raise $1 billion for an environment focused fund. Covalis already manages about $1.5 billion in assets centered on infrastructure, energy and renewables.
The Cayman Islands-based group plans to concentrate on industries that have committed to improving their carbon footprints and have attained higher valuations based on that.
It will back stocks in sectors such as chemicals and industrials. It hopes to make profits on investments once more concrete regulations, such as the EU Taxonomy for environmental, social and governance standards are formed. “At the moment there’s chaos in ESG, there are many different ratings systems,” said Zach Mecelis, founder of Covalis, who was a former trader at hedge fund GLG Partners. “Globally, ESG will be a more investable opportunity when it’s firmed up.”
The Rise of ESG Investing
ESG investing is slowly gaining traction among hedge fund investors and portfolio managers. Climate change and the environmental damage that it is causing due to rising temperatures, has forced the world to take notice. So much so that sustainable metrics are integrated into investment decisions when determining what bonds, equities to buy.
ESG investing takes into account factors like companies’ carbon footprints, employee diversity, labor governance and politics, or accounting practices, among other factors.
The IMF estimates that there are now more than 1,500 equity funds with an explicit sustainability mandate and investors are buying stocks in companies with a good track record in ESG issues. Sustainable funds attracted more than $20 billion till December of 2019. The IMF report says that ESG funds perform at par with conventional equity funds.
PwC has forecast that European mutual fund ESG assets will reach between €5.5tn and €7.6tn by 2025, up from €1.7tn last year. Firms such as Caxton Associates and Man Group use ESG as a key part of their investment process. The AIMA and KPMG conducted a survey of 135 institutional investors, hedge fund managers from 13 countries, and found that 84% of managers were interested in ESG-orientated funds.
Growing investor demand (72%), alignment with corporate values (37%) and evidence of material sustainability (35%) were the main three drivers behind increased adoption of ESG strategies, according to the survey, reports CNBC.
“The hedge fund industry, particularly Europe, has woken to the ESG demand,” said Petra Dismorr, chief executive of ESG consultancy NorthPeak Advisory. There has so far been “a small number” of ESG-focused portfolios launched in the hedge fund space, most of which are clean energy or climate solutions funds, she said.
More ambitious carbon-reducing technologies will see massive investments, and instead of governments, increasingly the corporate leadership will be driving the change. The formation of RE100 is a case in point where more than 150 big entities have come together to source 100 percent renewable energy.
“For the first time since WWII we sense a shift in which climate and the environment — not growth — will become the priority of governments and their citizens, as shortages of food, clean water and air become existential questions,” Saxo Bank Chief Economist Steen Jakobsen said in his latest quarterly outlook report.
Recently, equity firm BlackRock Ceo Larry Fink said in a letter to CEOS that climate change had become a defining factor in companies’ long-term prospects. He sees a significant reallocation of capital in this direction shortly. JPMorgan Asset Management recently launched a portfolio that invests with a range of ESG-focused hedge fund managers.
Karim Leguel, head of the company’s hedge fund solutions, said it was one of his “highest conviction” areas of investment. The fund was launched to encourage firms to focus more on ESG investing as till date people were only focusing on inviting in renewable funds and the area had to be expanded.
About Covalis Energy Transition Fund
The Covalis Energy Transition fund, was launched last May. It has about $120m in assets and made a 32 percent profit on it. The new fund will hold a basket of about 15 to 25 stocks made up of renewables and other businesses that are trying to improve their ESG rating. “We see a lot of companies that will become energy transition stories,” said Mecelis.
Covalis made a return of close to 100 percent on the money that it raised during last year’s coronavirus-driven market turmoil.
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