Part of an interview series with Zurich Insurance Group, The Pensions Trust, California State Teachers’ Retirement System (CalSTRS) and Environment Agency Pension Fund on selecting, appointing and monitoring managers
Please describe your selection process.
The in-house selection team works closely with our consultants throughout the process. We would first identify a need for a portfolio, for example a US large-cap value fund, and put out a call for managers. The RfP will include the portfolio requirements and a request for managers to submit responses to a list of questions, including ESGrelated questions.
Based on the manager’s responses, we select a subset to interview and for due diligence review. Consultants are involved in the RfP review, recommending who to interview and sitting in on the interviews. We also talk to other parties to get some broader insights on the managers.
We would then select an even smaller subset of managers, some of which we will hire whilst others will be kept on record as pre-qualified for future RfPs.
What information do you source during the selection process?
Information structured around what we refer to as the 4Ps - philosophy, process, people and performance:
- Philosophy: What guides your overall strategy?
- Process: What are the steps that you take to put the strategy into action? What do you look at when you invest in a security and when you continue to re-evaluate securities during the holding period?
- People: Who are the key contributors to the portfolio? Have they had training and are they compliant?
- Performance: What is the track record with the strategy?
How do you assess the ESG integration practices of potential portfolio managers?
We look at managers’ ESG integration practices at every step of the process. There are ESG-related questions in our RfPs, due diligence questionnaires and interviews. We ask questions that cover the 4Ps:
- Philosophy: Is ESG integration a part of your philosophy? Do you consider ESG issues in what you invest in?
- Process: How do you incorporate ESG factors into your strategy and as a part of your risk analysis? Where do you source the ESG research and tools? Do you make your own assessment on ESG issues or use third-party ESG ratings? How are active ownership practices and outcomes integrated into investment decisions?
- People: What is the level of investment and ESG expertise in the team? Where in the team is the ESG expertise? Do you have ESG specialists? Is ESG a part of everyone’s focus?
- Performance: Do you measure the ESG risk of the portfolio?
The responses to ESG-related questions may or may not have an impact on the final decision. If they have a good process, good people and adhere to a strategy, but the ESG component is not quite as strong, then we could hire them. On another occasion, there could be similar managers that perform well in our assessments but one has better ESG credentials than others. Then, ESG integration can influence the final decision.
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A practical guide to ESG integration for equity investing