Last week, Responsible Investor reported that Adam Seitchik, former CIO of Trillium Asset Management, is joining London-based Auriel Capital Management. RI's Hugh Wheelan wrote that in hiring Mr. Seitchik, Auriel "is joining a growing number of hedge funds building strategies in the responsible investment space."

Why are absolute return managers becoming more interested in environmental, social and governance (ESG) analysis? According to Mr. Seitchik, the Principles for Responsible Investment (PRI) have spurred broader investor interest in ESG research. In a conversation on June 22, he discussed the impetus behind his move:

"Over the past few years, I've been intrigued by the growing interest of institutional investors in ESG. We're seeing more and more asset-owner signatories of the PRI, and more institutions that have joined the Investor Network on Climate Risk (INCR). "We're also seeing more ESG investors who are not [self-described] ethical investors, but pursue ESG integration in the context of risk mitigation and fiduciary duty."

Adding to the ESG Toolkit

Mr. Seitchik said that Auriel will serve these investors with "our institutional investment platform, focused on risk-adjusted return. Our firm focuses on absolute return investing, but we can also deliver long-only strategies." To explain how Auriel could integrate ESG factors into its strategies, Mr. Seitchik described a hypothetical long/short fund:

"Investors are currently offered long-only themed strategies like clean-tech, or green energy. We are adding to the toolkit – ESG research can help support a strategy that goes both long and short. "If you are able to hedge, you can reduce risk across a portfolio. Let's say an institution is interested in risk management around ESG in general, or specific areas such as biodiversity loss, or sustainable forestry. You can construct a two-part portfolio – an active long-short portfolio attached to an index fund. You might get exposure by tracking an index, but then go short on a particular holding. You can reduce overall portfolio risks without having to disrupt the existing index fund strategy. "What really matters to investors is their overall risk and return. We look to provide not a single fund, but an investment platform that can be adapted to the needs of clients."

Why Now?

In our conversation on Monday, I mentioned another recent RI article on Philips' commitment to more responsible investment of its employees' pension fund. Mr. Seitchik agreed that this is an important step: a private, for-profit institutional investor is joining the nonprofits and governments that have traditionally pursued ESG integration. Asked to speculate on why Philips might be doing this, Mr. Seitchik laughed and said, "They're Dutch."

He was only partly joking. Mr. Seitchik cited broad European involvement with PRI, INCR, and other multi-stakeholder initiatives as an impetus for ESG integration. He also mentioned Philips' role as a leader in energy efficiency technology. "Hopefully this will spread to more US companies as well, though US capitalism really does follow a different model than European or Japanese capitalism, and is evolving in its own way," he said.

The Commitment to Advocacy

I pointed out that along with committing signatories to change their own practices, the PRI also ask them to promote responsible investment by others.

"That's right," Mr. Seitchik said. "PRI signatories have signed on to a broader project, beyond changing their own practices. They've joined a network of investors, and PRI provides progress reports and does other work to sustain and expand that network."

In that spirit, I asked if Auriel will promote ESG integration to all of its clients. Mr. Seitchik gave an intriguing response:

"Auriel will be agnostic on this question. Our ESG efforts are focused on those institutions that are seeking these types of solutions, such as PRI and INCR signatories, and foundations interested in mission-related investing. We think it would be presumptuous to approach the market and say: you should definitely integrate ESG into your strategies. We surely will have clients who do not, and this is a client-focused initiative, responding to what we believe is real and enduring demand."

At Auriel, ESG strategies will only be integrated into client portfolios where there has been a specific request to do so. "Now, if we're successful, and better returns can be attributed to our ESG strategies, then that will expand demand."

"That said, I've staked my career on this," Mr. Seitchik said. "I think the commitment to mitigating ESG risks and seeking opportunities will mature, and become more widely shared. As more asset owners participate in ongoing initiatives like PRI, responsible investing will become a permanent and pervasive feature of the global economy."