By formalising an investment process in a policy, asset owners differentiate emotions from facts when making investment decisions, keeping a relentless focus on performing in line with their investment strategy in an evidence-based manner.

Investment policy: process and pratice helps asset owners to revise and develop their investment policy and incorporate all long-term factors, including ESG considerations, into their investment decisions, no matter whether these decisions are made directly or indirectly. It provides:

  • a best-practice model structure for an investment policy;
  • detailed advice on researching and revising an investment policy;
  • guidance on how to implement an investment policy;
  • what to consider when monitoring investment policy efficacy.

It has been written for asset owners – public and corporate pension funds, superannuation funds, insurance companies, endowments, foundations, family wealth offices (etc.) – and specifically the individuals in those organisations responsible for investment policy development, whether decision makers or project members.

Organisations that support the formulation of investment policies (investment consultants or asset managers that work directly with asset owners throughout the investment process) will also benefit from the guidance provided.

Advocating the highest standard of ESG incorporation, the guide provides asset owners globally with future-proof best practice. Investment policy that codifies strategic considerations into mainstream investment practices and organisational processes paves the way for a future where asset owner strategy and policy are formally intertwined – enabling a day-to-day, razor-sharp focus on achieving an organisational mission – and where all material factors are incorporated into investment decision-making, in the name of optimum performance and long-term value creation.

ESG incorporation: A growing trend

In 2012, the PRI published Writing a responsible investment policy, outlining how an organisation can develop a specific responsible investment policy to complement its main institutional investment policy. Since then, the investment market has matured due to growing evidence of ESG factors influencing long-term performance – the materiality of climate change, for example, is now clear as day. A number of leading asset owners have led the trend of ESG integration, to ensure their investment processes are understood and practiced by all stakeholders in a coherent and holistic manner. For example:

  • PFZW (Netherlands) has identified 11 investment policy initiatives, five of which contain sustainability and/or responsible investment aspects;
  • CalSTRS (US) has recognised that incorporating ESG issues is consistent with their fiduciary duty as a longterm investor, and has included an Investment Policy for Mitigating ESG Risks into their Investment Policy and Management Plan;
  • OPTrust (Canada) has a statement of Investment Policies and Procedures, which holds that ESG factors have the potential to affect the Plan fs long-term investment performance, and recognises that it is their fiduciary duty to identify and address each and every factor that could affect investment returns.

Today, side-lining ESG considerations into a separate policy is not comprehensive enough. Full integration of all material factors entails the alignment of ESG factors and mainstream policy considerations, and makes for a sound investment policy.

Tailoring your policy

The ideal form and substance of an investment policy relies on many internal and external factors. With regards to ESG issues, some are global – climate change, demographic shifts, and resource scarcity affect all asset owners across the board, influencing activity and price discovery in most financial markets. The best way to account for these issues during policy development, however, differs from asset owner to asset owner. A tailored approach led by a robust investment strategy will produce the best outcome.

Regional requirements will further differentiate best practice asset owner policies. For example, in France, the French Energy Transition Law (2015) requires institutional investors to disclose how ESG criteria is considered in their investments decisions, which will shape investment policy for asset owners in that region.

Investment policy: process and practice