Step 3 - Strategy formulation | Technical guide

Asset owners need to decide how they are going to implement their investment principles in their asset allocation and risk management processes, and in their reporting.⁷ To do this, they need to define their ambitions (e.g. on financial return, risk appetite and ESG considerations) over an appropriate timeframe, and establish criteria to evaluate these ambitions against. They also need to create strategy scenarios, combining options of where to focus (e.g. geographies or asset classes) and how to succeed (e.g. sourcing). They then, based on this analysis, need to evaluate and select an investment strategy.

What is the role of investment consultants?

Investment consultants can help asset owner clients translate their beliefs or principles into formally measurable ambitions and criteria (e.g. on target funding ratios, on investment targets and on ESG performance and impact). They can help the asset owner define how ESG issues are to be taken into account. They can conduct scenario and other investment modelling to inform the asset owner’s decision on the investment strategy across the available investment universe. Their assumptions in the model can therefore determine the weight that the model gives to ESG issues, making this is a key area to explore with the investment consultant. Consultants can advise on which asset classes, sectors and geographies should be focused on. They advise on the investment management approaches available (e.g. active versus passive management) and the investment styles or factors to express in the portfolio. They can provide examples of strategies that have been adopted by other asset owners, including examples of how ESG issues have been taken into account and of how these have affected investment performance and wider organisational objectives.

Questions to ask the investment consultant

Does the investment consultant have a structured process to help clients take account of ESG issues in their investment strategy?
If the investment consultant provides advice on portfolio construction which incorporates ESG issues, how are these issues integrated into tools and services such as portfolio modelling and scenario planning?
How does the consultant assess and measure the ESG impact of the portfolio? And how is this integrated into the investment strategy?
Can the investment consultant provide one or more examples where clients adopted ESG issues in an investment strategy due to the consultant’s advice? What were the (dis)advantages or drivers for the client adopting such a strategy?
If a specific client ignored the investment consultant’s advice in relation to ESG incorporation, what was the key reason for this decision?