A new mutual fund from AQR Capital Management is taking a novel approach to Environmental, Social, and Governance (ESG) investing by not only backing companies that do well in meeting their ESG targets but also betting against those that don’t.
The Greenwich, Connecticut-based company’s AQR Sustainable Long-Short Equity Carbon Aware Fund (ticker QNZNX) launched on December 16, 2021. Its aim – to build a portfolio of U.S. and foreign stocks based on ESG criteria while also pursuing a net-zero carbon target.
As its name suggests, the fund will take “long” positions on companies it believes have sound ESG strategies as well as strong potential returns. It will take “short” positions on companies that don’t meet its ESG criteria, and that it considers overvalued.
In a press release announcing the new fund, AQR said the fund will differ from long-only approaches “that might prohibit exposure to a company with poor ESG characteristics.”
One advantage of shorting companies with poor ESG profiles is that it gives investors a chance “to more strongly express their ESG views and more effectively achieve ESG goals, such as reducing the carbon footprint of their portfolio” AQR added.
The long-short fund takes a carbon-aware approach, with the goal of helping investors hedge against climate risk. It plans to attain that goal by incorporating different metrics – such as carbon emissions and fossil fuel reserves – that will expose climate-related investment risks. It aims to net the carbon emissions of its underlying long stocks with those of its short positions to achieve a carbon footprint of zero.
The strategy represents a departure from the norm, which typically involves either investing in companies with a strong ESG record or using shareholder power to pressure them to transform their ESG activity.
Cliff Asness, AQR’s founder and Chief Investment Officer, has three decades of experience in investing, so he’s been around long enough to understand that short-selling a company to achieve ESG goals is a maverick approach. Asness he also considers it an effective one. “Using short selling to reduce carbon exposure, to get to net-zero or to achieve other ESG goals, is a vital tool,” Asness wrote in a September blog post. “It’s also a tool that can readily be incorporated into portfolio construction.”
AQR was founded in 1998 as Applied Quantitative Research. More than two decades later it has built a name for itself in ESG investing, and now manages about $25 billion in what it terms “dedicated ESG solutions.” Most of its ESG holdings are in carbon-aware portfolios, though it also has substantial holdings in sustainable companies. AQR’s strategy is to avoid companies with the largest ESG risk exposures.
AQR isn’t the only fund manager to launch a long-short ESG fund. A number of long-short ESG funds are listed in Luxembourg and Ireland, but this is the first in the United States, according to data compiled by Bloomberg.
AQR’s new fund arrives amid increased political, regulatory and social emphasis on sustainability practices in the investment community. This in turn has caused investors and asset managers to prioritize their ESG efforts – something AQR believes will lead to heightened interest in its kind of investing strategy.“ESG-conscious investors should not have to choose between a responsible investment approach and a well-diversified portfolio,” the company wrote on its website. “This Fund seeks to provide exposure to companies with certain positive ESG characteristics as well as to multiple sources of alternative return that may not be available through a traditional investment strategy.”