An asset owner’s specific approach to manager selection will differ depending on their ESG-related expectations, decision-making criteria and investment strategy. They should decide which requirements/questions should be included in RFPs and what information should be requested in questionnaires and during meetings with candidate managers.
2.1 Including ESG-related expectations in RFPs, questionnaires and discussion
ESG-related requirements should be incorporated into an RFP or similar document to frame the dialogue between an asset owner and the candidate manager.
While the broad ESG-related requirements/questions may be similar across asset classes and investment strategies, asset owners should recognise the differences between asset classes and investment strategies and include specific requirements/questions that are relevant to the requested mandate. For instance, questions regarding proxy voting policies will only be relevant in the context of listed equity mandates, while issues around energy ratings will only be relevant to property investments or some infrastructure portfolios.
Concrete examples should be requested from managers to give them an opportunity to demonstrate how they identify and manage ESG factors in their investments. For example, if a manager has indicated that they have endorsed their local corporate governance code, ask how this endorsement is reflected in voting and investment decisions. As an additional step, asset owners may ask investment managers to comment on their approach to a recent ESG issue that is likely to have affected the investment manager’s holdings.
An asset owner might ask about a manager’s:
- responsible investment policy and governance;
- ESG resources;
- incorporation of ESG factors in investment analysis and decision-making;
- voting and engagement;
During later stages of the manager selection process, an asset owner may meet with candidate managers to follow up on the information gathered in previous stages or to gain a deeper understanding of their processes. A site visit and/or conference calls to meet the key decision-makers in the candidate managers’ investment team could be organised. This may include those responsible for the portfolio on a day-to-day basis, the ESG specialist and the client contact.
2.2 Requesting evidence and/or concrete examples
The way ESG factors are integrated into investment activities will differ by asset class and investment strategy. In order to gain meaningful understanding about a candidate manager’s policies and processes, an asset owner could request evidence or concrete examples about how specific ESG factors impact a prospective or current investment.
The discussion below is most relevant to asset owners who place importance on integrating ESG information into investment activities. However, some of this material may be adapted for other uses of ESG information (e.g. screening, thematic investing).
The purpose of requesting evidence or concrete examples is to assess whether a manager is effectively identifying ESG risks and opportunities in an individual holding in a way that is aligned with the asset owner’s ESG expectations.
Some suggested approaches for asset owners wanting to use evidence and/or concrete examples in their discussions are:
- A candidate manager may have prepared evidence and/or concrete examples to support their responses. In this case, asset owners should be prepared to ask probing questions to examine if the ESG practices undertaken in this example are applied consistently to other comparable situations.
- An asset owner could consider discussing examples of high profile ESG-related events such as BP Deepwater Horizon or the Lonmin mine strikes. However, it is important to extend beyond these anecdotal discussions and discuss the way an investment manager applies a systematic approach to relevant issues across different sectors.
- An asset owner could consider preparing examples to discuss with the candidate manager. They could select an example of a company/sector/region that the manager invests in and examples of what the manager does not invest in. This will enable them to examine the manager’s decision-making process. If such an approach is taken, the manager should be informed before the discussion so that they are well prepared.
Regardless of the approach used, asset owners could prepare themselves for these discussions by conducting research on the ESG factors that impact the selected examples, bearing in mind the characteristics of the mandate envisaged. They may look to external research providers/sources to identify and understand the extent to which ESG factors influence the selected example.
2.3 Some approaches for evaluating potential managers
Each asset owner should have a manager evaluation approach that is suitable to their investment strategy. Regardless of approach, an asset owner should apply their ESG-related expectations or decision criteria to evaluate the information gathered from the selection process. For example, if an asset owner expects a manager to participate in or endorse specific ESG-related principles, codes of conduct, or initiatives, the asset owner should assess whether the manager is effectively fulfilling or implementing such initiatives.
In some situations, an asset owner may be willing to select a manager that does not meet its ESG-related expectations if the manager is committed to improving their ESG systems post-selection. In these cases, the asset owner may need to develop structured processes for monitoring the manager in order to measure and ensure progress.