Steps to ensure that asset owners have the systems, policies, processes and accountabilities they need to ensure that their investment beliefs and commitments are reflected in their strategies, governance processes and contractual relationships with managers.
1. Understand the investment environment
Understand the legal and other obligations that apply to the fund. These will include:
- formal legal requirements relating to investment;
- quasi-legal requirements, such as industry codes and standards;
- their own charters or other formal organisational obligations;
- beneficiary or stakeholder expectations;
- public commitments made by the organisation, for example, public policies or statements of investment principles.
2. Define investment goals
Investment goals are generally defined using financial measures, such as liquidity requirements and risk-adjusted return target. Investment goals should be informed by the organisation’s approach to risk management and time horizons, including the risks that are likely to be relevant over these timeframes, the implications of wider economic or market issues, and approach to ESG integration.
Asset owners also need to decide which risks will be managed and which risks will not, or cannot, be managed, and identify the market environments in which these losses may occur.
3. Define investment beliefs
Building on the investment goals, develop and codify a formal statement of investment beliefs, which focuses on the issues that are the most important drivers of the investment decisions. These beliefs serve as a lens for an institution on how to add value to, and how to navigate, the financial markets. These beliefs are lenses that differ from institution to institution and lead respective trustees, CEOs, CIOs and ultimately all investment staff to different investment approaches.
4. Agree investment strategy
Agree a clear and comprehensive investment strategy that sets in motion investment environment, goals and beliefs, as well as informs other organisational activities, such as asset class strategies, risk management decisions and reporting considerations.
5. Establish investment governance processes
Once the strategy process has understood the investment environment, defined investment goals and investment beliefs, ensure that the necessary resources, expertise and processes are in place to implement the strategy. In the majority of cases, asset owners will already have most or all of what they need for implementation. The implementation of their investment strategies should require limited change to their existing systems and processes.
Asset owners should ensure that sustainability/ESG factors are explicitly incorporated into the selection processes for investment managers, investment consultants and other advisers. They should assign specific weight to ESG factors in investment manager and investment consultant appointment decisions, and should explicitly assess the investment beliefs and the ESG skills as an integral part of all investment manager and investment consultant appointment decisions.
6. Formulate investment mandates
Ensure that investment mandates align investment managers’ approach with the asset owners’ investment beliefs and strategies. Attention should be paid to aligning timeframes through fees and pay structures, ensuring that ESG issues are fully integrated into investment decisionmaking, and ensuring that the investment manager engages with companies and issuers, and votes shareholdings.
Investment mandates should require investment managers to:
- implement the asset owners f investment beliefs and relevant investment policies;
- integrate ESG issues into their investment research, analysis and decision-making processes;
- invest in a manner consistent with the asset owner fs time horizons, understanding the key risks that must be managed to achieve the asset owner’s portfolio goals;
- implement effective stewardship processes, including engagement with companies and issuers on ESG issues and, for listed equities, voting all shareholdings – this engagement should align with the asset owner’s responsible investment and related policies;
- engage constructively and proactively with policy makers on responsible investment and ESG-related issues – this engagement should align with the asset owner’s responsible investment and related policies;
- report on the actions taken and outcomes achieved – the reporting should enable the asset owner to assess the manner in which the investment manager has implemented the asset owner’s investment beliefs and policies, and to understand how this has affected investment performance and ESG outcomes and impacts.
7. Monitor, review and report
Monitor the implementation of the investment goals, beliefs, strategy and policies, and periodically review them. This includes regular review of how investment managers are addressing the investment beliefs in practice. These reviews should include scrutiny of investments managers’ approach to stewardship (and voting where relevant), to ESGrelated research and decision-making and to public policy engagement.
Asset owners should also monitor the wider investment market to ensure that their practices align with best practice across the investment industry.
“Responsible investment is one of the investment beliefs of MN. Investing responsibly and achieving excellent returns are not mutually exclusive. We believe in investing in well-governed companies in a way that minimises negative impacts on society and the environment and, where possible, makes a positive contribution.”
Karlijn van Lierop, Head of Responsible Investment, MN
“Our goal as a pension fund is and must be to take the very best care of the assets we manage in order to preserve and multiply the capital to provide the best possible pensions for our members. When we consider our wish for a sustainable financial system, we have to keep this in mind, because there has to be an alignment between our quest for a sustainable financial system and our primary objective as trustee of our members’ pensions.”
Louise Jorring Gev, Head of Equities, Unipension
“Publicly stating our investment beliefs guards against falling for anything by standing for nothing. Given the many misaligned incentives that persist in the investment industry, beneficiaries and policy makers should require those investing on beneficiaries’ behalf to state the basis on which they do so. If those publicly stated investment beliefs do not chime with beneficiaries’ own views, beneficiaries should be enabled to find other providers with concordant beliefs. Greater clarity and transparency of investment beliefs should increase the professionalism and trustworthiness of the investment industry, with resultant benefits for all of our society.”
Justin Atkinson, Investment Director, Private Equity, Alliance Trust PLC
“OPTrust’s responsible investment team is part of the manager selection process for all equity and fixed income mandates. ESG questions are asked in RFPs and the responsible investment team is part of the manager interview, evaluation and selection process.”
Katharine Preston, Senior Manager, Responsible Investing, OPTrust
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How asset owners can drive responsible investment: Beliefs, strategies and mandates