Hedge Funds and ESG

ESG Adds Value for Our Investors

Ashton Global uses ESG factors which are vital when valuing companies in emerging and frontier markets. While the focus was generally on corporate governance, environmental and social components have grown in importance to investors. These factors can have huge impacts on the future value of a firm. We utilize the Five Forces Model from Michael Porter when applying ESG analysis to our investments.

Firms with high environmental, social, and governance (ESG) ratings are better at retaining customers and employees, cutting costs, and dealing with regulatory issues. These advantages are part of why we include ESG criteria in our investment decisions at Ashton Global. It is possible to focus on ESG without sacrificing returns. In fact, we have seen higher returns from companies with high ESG ratings.

Reducing Regulatory Risks

The focus for many ESG investors has been on governance, in part because it is an effective way to mitigate risks and the data is readily available in most markets. At Ashton Global, we like independent boards, few related party transactions, and simple organization structures. Furthermore, good governance involves establishing procedures that embody best practices and usually reduce costs.

Lawmakers, courts, and regulators are also aware of a company’s commitment to ESG. In some cases, concerted efforts to deal with ESG issues can make the difference between continuing to enjoy self-regulation and having regulations imposed by law. In other cases, companies that focus on improving ESG factors bring themselves into compliance with laws before they are passed.

By staying ahead of the game, conscientious firms can save time and money because they do not have to scramble to comply with new rules. McKinsey estimates that approximately one-third of corporate profits face legal and regulatory risks.

Regulators and courts have wide latitude in assessing fines and penalties. By doing more than the law requires, firms that emphasize ESG create a margin for error. They are much less likely to make mistakes that violate the law. When accidents occur, firms that emphasize ESG have earned the goodwill of the public and regulators.

Integrating ESG at Ashton Global

At Ashton Global, we integrate ESG with fundamental factors when making investment decisions. ESG issues are also part of our discussions with our emerging fund managers. Ideally, a dedicated ESG team will conduct research on all the investments. Furthermore, the ESG team will engage with fund managers to develop more holistic investment screening. 

We implement ESG by using several different approaches. Ashton looks at the effects of ESG goals on fair value and revenue, including the impact on reputation and sales in the retail sector. We also carefully evaluate the consequences of ESG for project costs.

While complying with increasingly rigorous environmental and labor standards imposes costs in the short term, good governance often saves money. In the long run, we feel that our commitment to conservation and diversity saves far more resources than it consumes.

Ashton Global uses big data and analytics to screen for ESG risks and event driven opportunities. The ability to obtain and analyze large real-time datasets gives us an edge over other emerging managers.

New Opportunities for ESG Investing in Asia

The increasing sophistication of capital markets in Asia also holds potential for Environmental, Social, and Governance (ESG) investing. Contrary to the popular notion that focusing on ethics carries a price, ESG usually outperforms the market. The University of Hamburg and DWS found a strong correlation between ESG and higher returns in 63% of the 2,000 studies that they examined.

Consumers expect more from businesses as incomes rise, and ESG investing increases returns by anticipating these shifts. China is now entering the middle-income stage of development where citizens and governments begin to focus on quality of life. Chinese President Xi Jinping recently created new superagencies to combat pollution and corruption, enhancing the nation’s attractiveness to ESG investors. On the demand side, there is increasing pressure from institutional investors and Millennials for more socially responsible investments.

Investing in the Future

Investing in companies that will outperform over the long run is one of our primary goals at Ashton Global, and ESG helps us do that. ESG investing prioritizes factors that will become more important in the future, such as reputation. With the growth of social media, reputation has become more critical and more difficult to control.

Actively pursuing ESG goals allows firms to build their brands and protects them from costly public relations disasters. More importantly, we now know there is no conflict between ESG and the traditional goal of pursuing profits. In fact, ESG is one of the best ways to maximize profits.