Investment firm Covalis looks to raise $1bn for ESG fund

Covalis Capital, an investment firm that made large gains after raising money during last spring’s market turmoil, has launched a fund that will try to profit from trends in environmentally focused investing.

Covalis, which manages about $1.5bn in assets and has offices in London and New York, is planning to raise as much as $1bn for the fund. It will back stocks in sectors such as chemicals and industrials that it believes will be given higher valuations by the market as they try to improve their green credentials by actions such as cutting carbon usage or investing in renewables.

The Cayman Islands-based group also hopes to profit as common environmental, social and governance standards — for instance, the EU Taxonomy, designed as a classification for what counts as green investment — emerge and increasingly influence share prices.

“At the moment there’s chaos in ESG, there are many different ratings systems,” said Zach Mecelis, founder of Covalis, who was a former trader at hedge fund GLG Partners. “Globally, ESG will be a more investable opportunity when it’s firmed up.”

The launch highlights how managers of hedge funds and other alternative investment portfolios are beginning to spot what they see as moneymaking opportunities in ESG investing, an area that is attracting huge investor interest. PwC has forecast that European mutual fund ESG assets will reach between €5.5tn and €7.6tn by 2025, up from €1.7tn last year.

While large traditional asset managers have rushed to launch ESG-focused funds, hedge funds and other investment firms have until recently been slower to embrace this trend, although some firms such as Caxton Associates and Man Group use ESG as a key part of their investment process. Some now see a chance to profit as flows from mainstream investors drive big moves in share prices.

“The hedge fund industry, particularly Europe, has woken to the ESG demand,” said Petra Dismorr, chief executive of ESG consultancy NorthPeak Advisory. There has so far been “a small number” of ESG-focused portfolios launched in the hedge fund space, most of which are clean energy or climate solutions funds, she said.

Last year JPMorgan Asset Management launched a portfolio that invests with a range of ESG-focused hedge fund managers. Karim Leguel, the asset manager’s Emea head of hedge fund solutions, said it was one of his “highest conviction” areas of investment. He added that one of the reasons the fund was launched was to encourage firms to focus more on ESG investing because the universe of such funds was “very limited, and most were renewable funds”.

The Covalis Energy Transition fund, a mix of internal and external money, was launched last May. It made about 32 per cent last year, and now has about $120m in assets.

The new fund will hold a basket of about 15 to 25 stocks and try to exploit pricing gaps between companies such as renewables, that already have very strong green credentials, and other businesses that are trying to improve their ESG rating.

“We see a lot of companies that will become energy transition stories,” said Mecelis. Covalis focuses on trading utilities, commodities and infrastructure stocks.

The firm made a return of close to 100 per cent on the money that it raised during last year’s coronavirus-driven market turmoil, to put into assets it thought were mispriced.

laurence.fletcher@ft.com