Asset owners need to identify a pool of investment managers who meet the requirements described in the mandate. In doing so, the asset owner will review and rank the investment beliefs and capabilities of individual managers, including on aspects such as investment philosophy, investment process, risk management, governance, product range and ESG capabilities.

The asset owner needs to discuss with the investment consultant whether their existing universe of approved managers include some that could fulfil their mandate – including as it relates to ESG capabilities – or whether the asset owner would expect the investment consultant to look beyond its standard universe.

What is the role of investment consultants?

The investment consultant often carries out the majority of research and meetings with managers to identify the manager universe. An important distinction should be made in this process between a manager’s firm-wide investment process or approach and how a specific product is governed. The investment consultant should clearly document the approach taken by managers to incorporating ESG into their investment processes and the results for their portfolios; specific attention should be given to product-level considerations.

There should be a clear process for communicating comparative views on managers, their products and the extent to which ESG has influenced recommendations in either of the following two ways:

  • Integrated approach: ESG scores are integrated into a scorecard of all or several dimensions using subindicators, with indicator explanations and scoring schemes describing desired ESG-related behaviours.
  • Standalone approach: A specific ESG selection scorecard, with its own indicator explanations and scoring schemes, integrated as a dimension in the overall manager selection scorecard.

Questions to ask the investment consultant

  • How does the investment consultant include (a) ESG incorporation (including integration, screening, thematic) (b) active ownership (including engagement and voting), (c) policy engagement and (d) reporting into asset manager research and ratings? Please provide examples.
  • How does the investment consultant incorporate broader approaches to ESG, such as culture, investment approach, objectives and investment policy?
  • How would the consultant take account of ESG issues in building longlists or rankings of investment managers?
  • Does the consultant’s approach to researching and rating ESG differ between asset classes?
  • Can the investment consultant provide examples of longlists where ESG considerations were adopted due to the consultant’s advice? What were the (dis) advantages or drivers for adopting these longlists?
  • 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 the research and long-list process reported by signatories (indicator: SAM 02.1).

Topics

Investment consultants and ESG: an asset owner guide