Asset owners will want to formalise commitments from investment managers through contracts or side letters to existing contracts. In addition to standard commercial terms, specific provisions related to ESG objectives and reporting can be included to ensure adequate delivery of services.

What is the role of investment consultants?

The investment consultant reviews contracts with managers and ensures that agreed commercial terms are included. Consultants may suggest how clients can set benchmarks, objectives and incentives linked to ESG in contracts or side letters with investment managers. They should proactively seek to incorporate desirable ESG expectations into contracts and/or side letters, and may also advise on establishing contracted ESG reporting requirements, paired with adherence to ESG guidelines, regulations, principles and standards.

Some consultants offer pro-forma contracts or umbrella approaches to harmonise the terms offered by managers or to reduce the costs of contracting for clients. This can exert a strong influence on the degree to which ESG terms are included appropriately in contracts, and how closely the consultant’s approach aligns to the asset owners.

Questions to ask the investment consultant

  • What would the investment consultant consider to be suitable ESG-related clauses in investment management agreements (IMAs) or side letters?
  • Can the investment consultant provide examples where clients adopted ESG considerations into IMAs or side letters due to the consultant’s advice? What were the (dis)advantages or drivers for the client adopting such a process?
  • 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 appointment process reported by signatories (indicator: SAM 04.1).

Topics

Investment consultants and ESG: an asset owner guide