The PRI has created a tool to evaluate and compare managers’ stewardship practices for sustainability outcomes, and a due diligence questionnaire (DDQ) which they can use to discuss this topic with investment managers.
Most investors are exposed to financial risks (and opportunities) associated with undiversifiable, system-level sustainability issues such as climate change, biodiversity collapse or social instability.
To manage such exposure in line with their fiduciary duties, many investors are pursuing positive sustainability outcomes to directly address the drivers of these system-level risks and create long-term value.
Stewardship is one of the most important mechanisms investors have to do so, whether as an independent tool, or in combination with investment decisions.
Asset owners that rely on external investment managers for their stewardship activities need to understand the extent to which these managers use stewardship for sustainability outcomes, and to try to align their priorities and actions where necessary, and possible.
To help asset owners do so, the PRI has created a tool to evaluate and compare managers’ stewardship practices for sustainability outcomes, and a due diligence questionnaire (DDQ) which they can use to discuss this topic with investment managers.
About this guidance
The evaluation tool and the DDQ aim to help investors (and their investment consultants if applicable) understand, evaluate and compare how managers use stewardship to address sustainability issues such as human rights, climate change and biodiversity.
They are relevant for asset owners and other investors that use external investment managers to conduct stewardship, and that aim to address sustainability-related financial risks and/or pursue positive sustainability outcomes more broadly.
These documents are supportive of each other but can be used independently. Asset owners can use the DDQ but choose their own evaluation approach, or they can use the evaluation tool to assess other stewardship reporting or disclosures from their managers.
The guidance aims to complement other due diligence questionnaires, the PRI Reporting Framework, stewardship codes, or other standards and frameworks that investment managers may need to disclose against. Each document contains an Appendix highlighting its correspondence to these.
These documents been informed by the PRI’s work on Active Ownership 2.0, asset owner selection, appointment and monitoring, as well as the Legal framework for impact project (see The fiduciary case for pursuing positive sustainability outcomes for more information).
Stewardship for sustainability and manager appointment
This guidance focuses on the selection and monitoring of external managers. However, it is also important for asset owners to reflect their position on stewardship and sustainability outcomes in contractual agreements during the appointment phase.
The 2022 Model Mandate, published by the International Corporate Governance Network and the Global Investors for Sustainable Development Alliance, guides asset owners on how to do so, while the PRI’s appointment technical guide helps them to address responsible investment principles more broadly.
The fiduciary case for pursuing positive sustainability outcomes
Investor portfolios are exposed to financially material risks linked to system-level sustainability issues, such as climate change, biodiversity collapse or social instability. By definition, these risks cannot be mitigated simply by diversifying portfolio holdings.
Instead, investors can try to address the drivers of these risks (and promote long-term value creation) by pursuing positive sustainability outcomes. If an investor concludes, or on the available evidence should conclude, that certain sustainability issues pose a material risk to achieving its financial investment objectives, it will generally have a legal obligation to consider what it can do to mitigate that risk and to act accordingly.
This could include using capital allocation, stewardship with investees or engagement with policy makers to pursue positive sustainability outcomes that could influence the relevant sustainability issues or the assets’ exposure to them; and to do so in ways that reduce the investment risk.
Read more about investors’ fiduciary duties to pursue sustainability outcomes in our Legal framework for impact work, a joint project between by the PRI, UNEP FI, the Generation Foundation, and Freshfields Bruckhaus Deringer.
Using this guidance in asset owner-investment manager dialogue
1. Articulating asset owners’ position and priorities on sustainability issues and outcomes
Asset owners should identify and articulate these in relation to their fiduciary duties, the financially material risks and opportunities they need to manage, and their core values. They can consider:
- their existing sustainability commitments, a top-down assessment of the most material sustainability risks, or a bottom-up evaluation of investment-linked outcomes;
- using relevant global sustainability goals and thresholds as a reference to ensure adequate levels of ambition.
2. Evaluating managers’ approaches to sustainability issues and outcomes
Asset owners can then assess the sustainability outcomes approach their managers take (at a firm and strategy level) and the extent to which it matches the quality and ambition of their own approach. A credible approach to sustainability outcomes includes:
- recognising that climate change, human rights, and other system-level sustainability issues, such as biodiversity, are likely to pose financially material risks for most investment portfolios; and
- committing to addressing these issues and outcomes by aligning with or contributing towards the relevant global sustainability goals and thresholds.
See sections 1 and 2 in the evaluation tool and DDQ.
3. Discussing and evaluating stewardship strategies and tools
Asset owners can then discuss and evaluate how their investment managers use appropriate stewardship tools to pursue positive sustainability outcomes. Such a discussion/evaluation should cover:
- How suitable different stewardship strategies and tools are for achieving a given goal. This will depend on the asset class, strategy, and market environment.
- How managers prioritise which investees or other entities to focus stewardship efforts on.
Investment managers may only be able to meaningfully engage with a small number of investees or other entities and are likely to achieve better results by doing so. Engaging many entities is not necessarily an indicator of more sophisticated practice, nor is using multiple stewardship tools, as opposed to one or two.
See sections 3, 4, and 5 in the evaluation tool and DDQ.
For any questions on the content of this document, please contact [email protected].
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We recognise that where asset owners invest in pooled funds, their ability to influence a manager’s stewardship activities ad priorities to align with their own will be limited. In such cases, we encourage asset owners to consider how aligned the sustainability stewardship approaches of prospective managers are with their own prior to making an investment decision.
Section 5 covers collaborative engagement. All investor activity undertaken through collaborative engagements should be done in keeping with relevant laws and regulations.