Selecting an investment manager that can act in accordance with an asset owner’s investment preferences requires thorough due diligence of the manager’s investment approach and performance, investment process, stock selection and portfolio construction decisions.
The manager selection process starts by defining the portfolio requirements in the mandate, before issuing a Request for Information (RfI) and/or Request for Proposals (RfP) (sometimes with an accompanying questionnaire). The short-listed investment managers will usually be required to complete a more detailed questionnaire and attend one or two meetings with the asset owner, after which an investment manager will be chosen. The approach will differ from asset owner to asset owner, depending on portfolio level expectations, investment horizons and size.
The due diligence of an investment manager’s ESG integration techniques can be included in the existing selection process, within each assessment method listed below.
For investment managers to effectively perform ESG integration practices, ESG factors should be systematically and explicitly included in all processes and tools within an investment management firm. Therefore, questions on ESG integration should be included amongst all questions related to the key assessment topics listed above.
Investment policy and firm structure
- Does your investment policy refer to your integration practices? If so, please enclose.
- Which person/team/committee is responsible for implementing a responsible investment programme and who is responsible for ESG analysis within the investment process?
- Does your organisation have a dedicated ESG team?
- If so, then please describe:
- how the investments team works with the ESG team;
- the ESG team’s responsibilities and how their work is used by the investments team;
- how the ESG team interacts with the investments team and how often;
- where the ESG team is located relative to the investment managers (e.g. same building, same floor).
- If not, please describe:
- if mainstream analysts/managers have been trained on ESG issues, and how;
- what ESG research mainstream analysts/ managers conduct.
- If so, then please describe:
- What are some specific examples of how ESG factors are incorporated into your investment analysis and decision-making process (e.g. asset allocation, definition of the investment universe, portfolio construction, fundamental or sector analysis, stock selection)?
- What ESG data, research, resources, tools and practices do you use to integrate ESG factors into your investment process, valuations and decisions?
- What weighting do ESG factors have on the decisionmaking process and investment decisions?
- How often do you review the ESG risk exposure of the portfolio and how often do you review your past ESG research and investible universe?
- How do you attend to both financial and ESG criteria during stock analysis and portfolio construction?
Asset owners may decide to hold and execute the shareholder rights internally, but if they outsource active ownership to the investment manager, the following questions are relevant:
- How does your active ownership practices impact investment decisions?
- What are some specific examples of how information acquired from voting and engagement activities translates into investment decisions?
- How are portfolio managers involved in active ownership activities?
- How often and how (e.g. meetings, written reports) will you report on ESG integration activities and performance?
- How do you communicate your ESG integration performance to your stakeholders (e.g. investors, staff, consultants, service providers, intermediaries)?
There are a number of ways that an asset owner can assess an investment manager’s integration practices using the questions listed above.
Asset owners can screen the market, using consultants or an in-house team, to shortlist eligible managers that meet their investment needs, including on ESG integration.
Consultants or in-house selection teams can use managers’ annual financial reports, responsible investment reports and the PRI’s publicly available Transparency Reports to gain insight into investment managers’ investment performance, decision-making and ESG integration approach. The PRI’s Assessment Reports provide more detailed information on a manager’s ESG integration capabilities. (Publishing these is voluntary – if a manager has not already disclosed theirs publicly, asset owners should ask managers to provide them with a copy.)
An investment manager’s performance and integration practices could be monitored for a set period of time while they are being considered for selection, to gain some insight into their likely future performance.
Request for Information (RfI) and Requests for Proposals (RfP)
As a key first step resource in assessing managers’ capabilities, asset owners should ask managers to answer questions on their ESG integration capabilities within the RfI and/or RfP.
Asset owners can expand the questionnaires typically included in their RFPs and first round meetings (covering track record, recent investment performance, investment style, firm structure and governance, investment process and investment policy) to include questions on ESG integration. Questions used here usually focus on how ESG factors are included in the investment process, what ESG research is used and how ESG factors affect investment decisions.
Embedding ESG-related questions throughout the questionnaire, rather than separating them out into an ESG-specific section, makes it more likely that they will be responded to by portfolio managers rather than a separate team that is not involved in the investment decisions.
Meetings that asset owners hold with the managers that have made it through the RfP stage provide another opportunity to assess managers’ investment approach, investment process and ESG integration capabilities.
It is an imperative to meet the portfolio manager, investment team and ESG team (if the manager has one) in person. Visiting the teams of a prospective manager gives a better understanding of the level of responsible investment conviction they hold, as does their level of willingness to discuss their approach and performance in person. It is also an opportunity to verify the responses to the questionnaire, by seeing the investment process in action.
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