To review investment performance and managers’ integration practices, asset owners: organise periodic monitoring meetings with investment managers; ask them to complete questionnaires/regularly report; and/or use methods such as peer analysis, internal scoring systems and portfolio analytic tools.

The monitoring phase is crucial to assess the actual delivery of the terms and conditions on which the manager was appointed. This will cover a multitude of areas, includes assessing their investment approach and decisions and their ESG integration practices and performance, including their ability to manage the portfolio in line with the mandate and investment management agreement.

Assessment topics

For investment managers to effectively perform ESG integration practices, ESG factors should be systematically and explicitly included in all investment decisions. Therefore, questions on ESG integration should be included amongst all questions related to the key assessment topics listed above.

Example questions

Security analysis and selection

  • Have there been any changes to your ESG integration process over the reporting period (e.g. additional resources, information sources)? If so, why?
  • Which integration practices/tools have worked and have not worked over the reporting period, and why?
  • What are some specific examples of how ESG factors have impacted investment decisions?
  • What are some specific examples of major ESG risks that you identified in the holdings in the portfolio over the reporting period, and what have you done to mitigate them?
  • Have concerns over tracking error prevented you from divesting a holding with high ESG risks? If so, what is a specific example?
  • What are some specific examples of ESG factors contributing to buy and sell decisions, e.g. are there any examples of instances where you chose one company over the other due to ESG considerations?
  • What are some specific examples of valuations being adjusted due to an ESG factor? How did this impact the investment decision?
  • Regarding the recent revelations about company X in the portfolio, why did you buy/hold/sell the stock or increase/decrease your holdings?

Active ownership

  • How was ESG information that had been gathered through active ownership activities used to identify investment risks and opportunities? What impact has this had on investment decisions?
  • How have you measured success of the engagement? Was this quantifiable? If not, what were the qualitative results?
  • How are portfolio managers involved in active ownership activities?
  • What are some specific examples of engagement activities or voting outcomes resulting in a stock being sold or bought?

Assessment methods

There are a number of ways that an asset owner can assess an investment manager’s integration practices using the questions listed above.

Reporting

The amount, frequency and type of information that asset owners request from investment managers depends on the mandate, the agreed ESG policies and practices and the asset owner’s capacity to review the information. The investment managers’ investment process and integration techniques should be included in their reporting and their reports should be regularly updated with examples of ESG integration in the current reporting year.

In 2015, a group of 14 UK pension funds published A Guide to Responsible Investment Reporting in Public Equity, outlining some preferred ESG integration reporting requirements for managers.

Peer analysis

An asset owner can execute, or ask their investment consultant to execute, a peer analysis of ESG integration performance based on publicly available information such as responsible investment reports or the PRI’s Transparency Reports. 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.)

Questionnaires

Questions should cover the assessment topics listed in the table on the previous page, with a particular focus on portfolio construction and stock selection. Information in questionnaires should create a basis for discussions in monitoring meetings (more details below).

Meetings

ESG integration should be discussed alongside investment performance. The asset owner should ensure that they are meeting with the key decision-makers, such as investment analysts, the portfolio manager and the ESG team.

The meetings should discuss the portfolio’s investment performance, the level of investment risk in the portfolio, what changes have been made to the investment process and integration practices, and whether the investment manager is actively and successfully integrating ESG factors into investment decisions.

ESG-specific questions should focus on integration practices, portfolio construction and stock selection decisions, including specific stock and sector examples that demonstrate managers’ integration techniques and reveal their level of responsible investment conviction. They should refer to the specific issues that are material to the company – e.g. cyber risk for banks, labour standards in supply chains – rather than merely referring to ESG in general.

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