Taking the pulse on ESG: navigating long and short strategies

ESG risk management in South African hedge funds: The RisCura ESG team once again surveyed South African hedge fund managers. They found positive shifts in attitudes towards ESG integration in the hedge fund space but mixed results in how this translated into ESG ratings

Brooke Leaf-Wright, Chris Rezelman, and Susanna Yang, RisCura Sustainability Team

At RisCura, our specialised team of analysts compiles daily analytical reports that provide comprehensive insights into a substantial South African hedge fund market segment. Our extensive coverage and deep-rooted experience of emerging markets give us a distinctive vantage point, allowing us to engage actively with South African hedge fund managers.

In 2022, we sent a survey asking South African hedge fund managers about their attitudes and approaches to ESG integration. Last year’s survey provided valuable insights and showed generally positive perspectives on ESG amongst surveyed managers. In 2023, we decided to repeat the exercise with a specific focus on long/short strategies within hedge funds. This allowed us to concentrate on this particular strategy. We also conducted our own data analysis of ESG risk management (ESG scores) of hedge funds to complement the survey research.

Additionally, we chose to investigate the implementation of ESG integration within long/ short funds by evaluating the ESG ratings of 20 such funds, collectively representing a substantial AUM of approximately R32 billion. We used MSCI ESG ratings as a proxy measure for ESG risk management. These ratings assess a company’s ESG risk exposure and management practices through the evaluation of environmental (E), social (S), and governance (G) factors on a scale of 0-10. These comparable ratings can be aggregated across holdings to arrive at fund or portfolio-level ratings.

Each portfolio was split into long and short positions, and respective aggregate ESG ratings were determined. We hypothesised that there would be a significant difference in the ESG risk profiles (MSCI ESG ratings) of the long positions versus short positions. One would expect long positions to have higher ESG scores (lower ESG risk), reflecting a preference to invest in companies with strong ESG credentials to reduce risks associated with poor ESG performance. Conversely, one might expect short positions to single out companies with perceived ESG weaknesses and, therefore, have lower aggregated ESG scores. We decided against reporting on “net exposure” – netting long and short positions – as this is widely criticised, as taking a short position against a given asset does not reduce a portfolio’s exposure to the said asset.


In 2022, 18% of survey respondents said they “did not factor ESG into the investment decision-making process”. This figure dropped to 0% for 2023.

Chart 1: Average ESG rating across short and long positions

Chart 1 (Average ESG rating across short and long positions) illustrates a comparison of ESG ratings between short positions and long positions in hedge funds.

It reveals that short positions have a higher ESG rating of 7.25, while long positions have a slightly lower ESG rating of 6.81.

Our findings also revealed that 78% of survey respondents consider ESG integration as “very important” in their decision-making process, with roughly 55% and 44% of managers indicating that ESG was, at one time, the primary determinant for taking a short or long position, respectively. This speaks to the importance hedge fund managers attribute to ESG integration.

However, the data pertaining to overall ESG ratings did not align with our expectations. The short positions had an ESG rating of 7.25, while the long positions had an ESG rating of 6.81 (see chart 1). There could be myriad reasons why the ESG data shows this, and RisCura will conduct a study at another time to investigate.

We asked managers which pillar they felt was most relevant to the hedge fund space in 2022 and 2023. In both surveys, the prevailing sentiment among managers was that all ESG pillars were “equally relevant”, closely followed by a preference for “governance only” (see chart 3). Thus, we anticipated that more might be revealed by breaking the data down into individual pillar scores (see chart 2). Instead, this further emphasised the finding that short positions tended to have better ESG risk management as captured by ESG ratings when compared with long positions.

Since the overall ESG ratings and individual pillar scores did not seem to align with our expectations nor correlate with survey responses, we decided to look into some of the data points that make up the pillar scores and, ultimately, the overall ESG ratings.

Chart 2: Individual pillar scores across positions

Chart 2 (Individual pillar scores across positions) breaks down the ESG pillar scores within hedge funds for short and long positions.

It reinforces the finding that short positions typically exhibit stronger ESG risk management, as reflected in their ESG ratings, when compared to long positions. This emphasis highlights the nuanced ESG performance differences between the two.


In this granular analysis, we found some insights that might indicate managers are considering ESG risk in the stock selection process in short positions. We found that of the top 10 most frequently shorted positions, 40% of them had privacy and data security issues. Data security issues frequently receive media attention, and the legislation surrounding privacy and data security, exemplified by the new POPI Act, indicates that this issue will likely gain momentum. Managers may be identifying a risk that companies failing to implement sufficient data and privacy safeguards could face fines, negative media attention, and a loss of customer support.


It is also true that ESG risk management is only one tool in the risk management toolbox. Furthermore, alongside other types of risk, such as market and financial risk, ESG risk management needs to be carried out within the context of the overall investment strategy. From the survey and our data work, we cannot definitively assert which ESG risks are under consideration by managers, nor can we unequivocally state that managers are successfully integrating ESG into their investment decision-making processes to the extent they claim. We also recognise that there are limitations to ESG ratings, and given the divergence among ratings, many managers choose to either use a combination of ratings providers or use their own internal methodology to calculate ESG risk.

From our pool of surveyed managers, only 22% said they make use of an external data provider. Of those 22%, they all said they made use of multiple data providers. This observation could suggest a lack of confidence in rating agencies or may indicate that ESG ratings are still in a relatively early stage of development.

Chart 3: Manager preferences for ESG pillars

Chart 3 depicts the preferences of hedge fund managers for different ESG pillars in both 2022 and 2023. When asked: “Which ESG pillar do you consider to be most relevant to the hedge fund space?” it shows that managers predominantly considered all ESG pillars equally relevant (55%), followed by a preference for focusing on governance (36%). This chart highlights manager sentiments regarding ESG pillars within the hedge fund industry.

Implications and significance

ESG ratings are nuanced, and some argue they should be treated much like valuations: taken with caution and complemented by the investor’s judgment and research. ESG ratings are also often lagged due to a delay in data, which may not align well with the fast-paced, frequent trading environment in which hedge funds operate. The integration of ESG into hedge fund strategies is influenced by multifaceted factors that extend beyond a fund’s strategic goals, making it difficult to derive clear conclusions at a high level. This is a reminder that while our data shows some unexpected results, we must interpret it within market dynamics.


ESG as a risk-management tool in hedge funds is still in its early years, and hopefully, as time progresses and with more research, we will be better able to understand how ESG risk management plays out in the hedge fund space. The manager survey offered valuable insights, with many indicating a strong degree of ESG integration into their investment processes. However, the divergence between our initial hypothesis and the level of ESG integration described in the manager survey forced us to dive deeper and left us with additional unanswered questions.

The lack of clear answers highlights the complexity of ESG integration within hedge funds and underscores the need for enhanced transparency, improved ESG education, and standardisation efforts. With continuous monitoring and peer collaboration, we can hopefully create an improved landscape for ESG integration. It is important that those involved continue to ask the right questions. From there, we can pave the way for more effective ESG risk management and investment practices in the South African hedge fund landscape. Copyright. HedgeNews Africa – November 2023.

To download a copy of this whitepaper, visit riscura.com/newsroom/articles/.

Susanna Yang, Chris Rezelman and Brooke Leaf-Wright are part of the RisCura Sustainability Team, helping to combine sustainability reporting with risk and performance to provide clients with accurate reports that help them make informed decisions.