Hedge funds and other alternative asset managers should be integrating socially responsible investing factors into their investment strategies, suggests a new report from Cerulli Associates.

The report found there’s a growing demand from investors for alt managers to consider the environmental, social and governance (ESG) factors in their funds, alongside their financial returns. Cerulli said that its survey of European private banks “found that increasing client demand is the key factor in the growing importance of [responsible investing (RI)] to such institutions.”

The Boston-based consulting firm also said that while institutional investors typically focus on climate change, younger individual investors are more interested in “a broad range of responsible investing strategies, such as sustainable agriculture, ocean conservation, the effect of plastics on the environment, and higher education.”

Cerulli also reported that its latest survey of hedge funds found that approximately 60% of European hedge fund managers are currently integrating ESG factors into their investment processes, and 40% have “engagement and active ownership” practices. “Those figures show that there is still plenty of room for improvement,” the firm said.

Additionally, Cerulli noted that ESG policies tend to be adopted by larger funds.

“Manager size is important: large hedge fund managers are significantly more likely than small firms to have established RI policies,” said Justina Deveikyte, associate director in Cerulli’s European institutional research team and lead author of the report.

“Our survey found that 62% of hedge fund managers with assets of more than €5 billion have well-documented, firm-wide RI policies, whereas only 29% of managers with assets of less than €5 billion have such policies,” she added.

Cerulli said that alt managers “need to have clear responsible investment policies, provide full ESG reporting, and employ staff dedicated to ESG.” However, it also noted that cost represents one of the primary obstacles.

“A lot of things still need to be done before RI is fully mainstream,” Deveikyte said. “For example, the asset management industry needs to establish minimum ESG reporting standards and harmonize the scoring methodologies ESG data providers use. Alternative managers should seek to provide innovative RI integration practices and identify ESG factors that signal both risk and opportunity in value creation.”