Not all forms of responsible investment (RI) constrain or oppose the premise of unconstrained and actively run hedge funds, according to a report.
The report by the Alternative Investment Management Association (Aima) and law firm Simmons and Simmons found some of the most popular types of RI were based on factor weighting which could be determined by the fund manager.
“In many cases RI is simply a means of using data to make more informed investment decisions,” the report said.
The report noted that RI was compatible with both short selling and offshore fund structures.
It said short selling a responsible investment was not irresponsible or unethical and could be a critical tool for a hedge fund manager.
“For instance, a manager could short a company with poor environmental practices that were hidden from the public and which the market had failed to price in,” it said.
“However, it should be noted that some of the most stringent responsible investors may prohibit short selling for a variety of reasons.”
On offshore fund structures Aima said international initiatives sought to address deficiencies in the international taxation system and create a fair tax system. The measures along with expertise offered by offshore jurisdictions promote responsible and ethical investments across the globe, it said.
“In spite of this, certain investors—such as Northern European investors, who have historically been very significant allocators to ESG strategies— may prefer onshore structures,” it said.
Regulatory principles
The report also formulated seven principles that would help create effective RI regulation.
Aima stressed that RI should be investor-led and to require all investment managers to adopt RI principles would be unwise as it could conflict with their fiduciary duties.
It said any RI regulation should be high level and principles-based that allowed managers the flexibility to adapt their strategies and asset allocations in response to RI evolution.
Aima noted that regulators should be mindful that RI was not applicable to all investment strategies such as short-term sovereign bonds.
On the risk of duplication, the report said there was a danger that regulation might create a situation where RI processes were regarded as separate from more “traditional” aspects of investment management. This would prevent RI from becoming an everyday part of investment management.
Other principles the report said would be important for RI regulation were consistency, practicality, and that it needed to be broad-based.
