Incorporating ESG factors into manager appointment

After a manager is selected, an asset owner may negotiate and agree on a number of ESG-related terms and conditions.

Including ESG-related terms in IMAs is not the only way to hold a manager accountable to the ESG policies and practices agreed upon during the appointment process. An asset owner may instead choose to focus on regular monitoring to ensure that their managers are consistently improving their implementation of the agreed upon ESG policies and practices.

A side letter agreement could be an alternative to writing specific ESG-related requirements into the IMA. Side letters form a legally enforceable understanding between two parties. They provide a formal record of the asset owner’s wishes and the investment manager’s intention to abide by them. Side letters could also be used to amend existing agreements.

Asset owners should consult their legal counsel regarding the objective and specific language to be used.

Below are some sample ESG-related clauses from industry bodies and PRI signatories. The example clauses included below do not address all of the expectations discussed in this document. asset owners may wish to include other clauses that are specific to their contractual requirements.

Examples of ESG-related clauses from the ICGN Model Mandate Initiative

Proposed model terms for monitoring ESG

The Manager will have a process for monitoring current or potential investments in relation to relevant long-term factors such as ESG concerns. The Manager will ensure that its staff apply due care and diligence to applying this monitoring process, including considering the extent to which such long-term factors generate investment risks or opportunities.

Proposed model terms for ongoing due diligence

The Manager will facilitate access by the Client to its staff and systems such that the Client can gain assurance on an on-going basis that the Manager is appropriately implementing the Client’s responsible investment policy set … [as agreed with the Client in schedule XX] …, monitoring key longer-term risks and integrating such factors into its investment and risk management decision-making.

Proposed model terms for voting

Alternative 1 [where Client or its agent has voting control]: The Manager will enable the Client or its designated agent to direct the exercise of any voting rights attaching to the Portfolio investments.
Alternative 2 [where Manager votes according to Client guidelines]: The Manager will procure the exercise of any voting rights attaching to the Portfolio investments in accordance with the Client’s expressed voting guidelines, with a view to achieving best practice standards of corporate governance and equity stewardship and with the aim of adding value to, and/or preserving value in, the Portfolio, as well as reducing unwanted risk exposures.
Alternative 3 [where voting control delegated the Manager]: The Manager will procure the exercise of all voting rights attached to the Portfolio investments on the Client’s behalf, in accordance with the Manager’s voting policy and any market-specific guidelines approved by the Client. The Client reserves the right to rescind, upon [one day’s] advance written notice, the Manager’s authority to make voting decisions for specific companies, issues or time periods. The Manager will use best endeavours to facilitate such Client voting decisions to be implemented. The Manager will have in place appropriate policies to manage any conflicts of interest in relation to voting matters and shall report at least quarterly on all votes involving companies where the Manager or an affiliate have a contractual relationship or other material financial interest.

Proposed model terms for reporting

In addition to reporting requirements set forth elsewhere, the Manager will prepare no later than x business days after the end of the relevant [quarter], reports covering the reporting period, including:
- Standards and High Level Commitment: compliance with the policies and standards … [as agreed with the Client in schedule XX] c, including any instances where those policies and standards were set aside in order to achieve investment objectives; governance structures at the fund manager and an explanation for any non-appliance of relevant best practice standards.
- Monitoring: the key material ESG concerns associated with Portfolio investments and an explanation how the Manager sought to identify, monitor and manage them.
- Stewardship and voting: a brief summary of the reporting period stewardship activities, including evidence of the effectiveness of those activities.

Full disclosure of voting activities over the reporting period, including an explanation of any exercises of discretion under the Manager’s or Client’s voting guidelines and conflicts of interests.