Following the release of our technical guides on selecting, appointing and monitoring investment managers, the PRI convened a number of panel discussions to talk through how asset owners can work collaboratively with investment managers throughout the selection, appointment and monitoring process.
- The discussions included representatives from Afore XXI Banorte, Aware Super, CALSTRS, Eskom Pension and Provident Fund, Hong Kong Monetary Authority, Local Government Superannuation Scheme, Meketa Investment Group, Mercer, OPTrust, Swiss Re and Wespath.
Key takeaway: Work with managers whose business practices and investment philosophy are aligned with your values, and then clearly communicate specific ESG expectations.
Participants agreed that collaboration across the asset owner community is of utmost importance. The ability to share ideas and best practices is crucial, especially for those new to integrating ESG issues into portfolios. Asset owners agreed that they have real power to move responsible investment forward and help shape the financial services industry.
“Make the first step. It’s a long road but we need to react and be active, not passive, in adopting ESG factors.”
Once asset owners understand and can articulate their ESG values and beliefs, they have a powerful voice to influence the mandates of investment managers. Having a consistent ESG approach that outlines clear expectations is critical in allowing investment managers to regularly focus on ESG factors in their investment decision process. Clear communication and transparency from asset owners to their investment managers was identified as key to increasing accountability.
Sharing practical perspectives on ESG investing, and exploring and explaining how it can integrate into what asset owners are looking to accomplish with their portfolios, is a vital part of investment managers understanding and fulfilling their duty to their clients. If an investment manager does not share an asset owner’s beliefs that ESG incorporation can contribute to risk and return, then they are not the correct match.
“We need to generate enough money for pensioners to retire on… and a world to retire into.”
Selection
Key takeaway: Ask investment managers about examples demonstrating that considering ESG factors leads directly to specific investment and security-level decisions.
Participants reported that digging into the investment process, and asking investment managers for real-life, tangible examples of ESG considerations having changed decisions, enabled them to detect if the manager’s claims around ESG integration are legitimate. In addition to asking broadly about people, philosophy and process, participants found use in specific questions, such as:
- Do analysts evaluate the stock and then weight the ESG elements?
- Does the same analyst evaluate the financials and sustainability factors?
- How is ESG data factored into the risk premium, credit rating and cash flow forecasts?
- Describe a time when ESG analysis changed the valuation process and led to a new or larger position.
- How do ESG factors alter fair value targets in investment decisions?
These questions should accompany inquiries into internal policies on legal, risk management, performance track-record, compliance and technology capabilities. Participants agreed that asking ESG questions in the RFP was a good start, and that following up with a conversation with the investment team and portfolio manager on the same topics helped to reveal how ESG factors are integrated throughout the investment process in practice.
Many participants reflected on the ESG differences across asset classes. For example, infrastructure, real estate, hedge funds and private investments require a different ESG approach than public equities and debt. But even within public markets, different strategies have varying levels of ESG data available to work with, such as there being much more data available for large-cap equity strategies than small-cap ones.
Outside of the portfolio, participants echoed the importance of the tone set from investment managers’ leadership, such as senior management and board commitment to incorporating ESG issues. Posing questions about the material ESG issues that investment managers face and how they are addressing those helps to determine if ESG work in the portfolio translates into corporate management and leadership.
“Ask asset managers how they have embedded consideration of ESG risks into the culture of the firm.”
Appointment
Key takeaway: Utilise the Investment Management Agreement to reinforce your expectations and non-negotiables for ESG integration and reporting in the portfolio.
Appointing an investment manager establishes the formal relationship and is the foundation for the future partnership, yet many participants do not currently include requirements around ESG factors in their legal contracts. This was especially true for asset owners in North America.
When ESG metrics are included in the IMA, they typically take the form of exclusionary lists, minimum ESG reporting requirements, annual KPIs and details of on-site interviews with the investment team.
Many found that incorporating their ESG expectations on proxy voting, engagement and country-specific principles (such as the Australian Modern Slavery Act) aligned with principles in their region’s stewardship codes or the UN Global Compact. Legal contracts that specify reporting on specific ESG KPIs enable asset owners to ensure portfolios are managed in line with their stated values. Participants noted that portfolio mandates to meet net-zero emissions targets could be a likely addition to IMA documents in the future.
“The attestation approach puts a legal burden on investment managers to make true and fair disclosures, and to demonstrate that they are repeatedly considering ESG factors.”
Monitoring
Key takeaway: Use the various tools at your disposal to ensure portfolios are consistently aligned with your ESG mandate.
Participants agreed that reporting, and meetings with the investment manager, help assess greenwashing and ensure that the asset owners’ ESG views are being implemented in the portfolio. The monitoring process has increased in importance as the quality and sophistication of ESG strategies have risen. Submitting annual questionnaires for investment managers to explain investment decisions related to ESG, and then following up with calls or in-person discussions, enables asset owners to confirm that the investment teams’ decisions are aligned with client reporting.
Proxy voting was cited as a key area in which to monitor investment managers. Evaluating a manager’s voting record on specific topics, as well as the percentage of time the manager votes against management, can provide valuable insights. Understanding the rationale for votes for and against can also confirm if the manager’s views align with the asset owner’s. Participants noted that evaluating engagement programmes with companies, and ESG engagement themes, serves as another way to monitor value alignment.
Using specific ESG KPIs enables investment managers to clearly understand what the asset owner is looking to accomplish. This can also be a powerful tool when used to compare all investment managers in the asset owner’s portfolio. Looking at specific outcomes by manager, as well as each manager’s relative standings, can provide a more robust view of how the overall portfolio is aligned with intended targets.
“Do the preparation work before meeting and look for idiosyncratic risks in the portfolio.”
