Step 2 – Investment principles and beliefs | Technical guide

Asset owners need to define investment principles to set the direction for their investment policy, investment practice and organisational culture. These principles help define how the asset owner will create investment value in the context of future uncertainty, risk and opportunity. They also help asset owners make practical decisions about their asset allocation, investment decisions, investment style, performance objectives, selection and monitoring of investment managers and approach to active ownership.

What is the role of investment consultants?

Investment consultants often play a key role in the development of investment beliefs or principles. They can guide and facilitate the asset owner through a process of discovering and articulating its investment principles. They can provide evidence that helps the asset owner reach a conclusion on specific principles (e.g. on the sources of investment performance or outperformance, or on the role of ESG factors in investment strategy). They can provide examples of principles that have been adopted by other asset owners.

In providing this advice, the investment consultant needs to be able to describe and take account of macroeconomic trends and risks, including ESG factors.⁶ The consultant also needs to understand whether the client has any particular ESG preferences – whether explicit or implicit, and whether from the board, trustees, the operations team or clients and beneficiaries – that need to be taken into account.

Investment principles can become granular, and a good consultant should be able to provide a framework for discussing and workshopping beliefs based on appropriate evidence, and be able to summarise them effectively.

Questions to ask the investment consultant

Does the investment consultant have a set of its own principles in relation to incorporating ESG considerations into its business practices and advice to clients?
Does the investment consultant have a structured process it follows to help clients develop their investment principles?
Can the investment consultant provide one or more examples where a client adopted ESG issues into their investment principles due to the consultant’s advice? What were the (dis)advantages or drivers for the client adopting such principles?
If a specific client ignored the investment consultant’s advice in relation to ESG incorporation, what was the key reason for this decision?

The PRI Data Portal provides examples of investment principles and beliefs reported by signatories (indicator SG 01.4)