• AQR’s new fund: Targets $350 million with a strategy combining ESG principles and market-beating returns.
• Mixed ESG results: Recent data shows ESG investments underperforming traditional benchmarks.
• Cautious optimism: AQR’s approach aims to mitigate risks while still adhering to ESG criteria.

AQR Capital Management LLC, a leading quantitative firm, has attracted approximately $350 million for its newly launched Adaptive Equity Market Neutral UCITS Fund. The fund aims to demonstrate that environmental, social, and governance (ESG) considerations can align with the goal of generating market-beating returns.

The fund, spearheaded by AQR co-founder Cliff Asness, is designed to short stocks with poor ESG profiles and invest in those with higher ESG scores. Michele Aghassi, AQR’s principal and head of sustainable investing, explains, “It’s not that we think being long any ESG characteristic and short any ESG characteristic is financially attractive on its own. It depends on which ESG characteristic.“

The debate over whether ESG strategies can enhance returns is ongoing. Critics often highlight the underperformance of ESG-associated sectors like wind and solar, particularly amid rising interest rates. For instance, the S&P Global Clean Energy Index has dropped nearly 30% since early 2023, whereas the S&P 500 has surged over 40%.

In Europe, ESG is increasingly integrated into financial regulations, contrasting with the U.S., where some states have penalized firms for adopting ESG strategies, arguing it conflicts with fiduciary duties.

Amid these divergent approaches, AQR’s new fund seeks to balance ESG criteria with financial performance. Aghassi notes, “Because our investment universe is so broad, we’re able to – for an investor base that has ESG requirements – also consider ESG profiles with little impact on the return potential of the portfolio.”

Despite the promise of ESG strategies, recent performance has been mixed. The CFM Quant Sustainable Absolute Return Fund is down 4% this year, while Trium Capital LLP’s Climate Impact Fund is up about 3%, both underperforming many peers. Overall, ESG equity funds in Europe have gained 11% this year, trailing the MSCI World Index’s 15% rise and the Stoxx Europe 600’s 10% increase.

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The top-performing ESG funds tend to favor Big Tech stocks, while those focused on green energy transitions have struggled, reflecting a broader trend within the ESG investment landscape.

As AQR moves forward with its Adaptive Equity Market Neutral UCITS Fund, it will be navigating this complex terrain, aiming to prove that ESG and financial returns can, indeed, go hand in hand.