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.
We will define the portfolio guidelines for a new mandate after we have reviewed our strategic asset allocation and made a risk assessment of our overall portfolio. The guidelines and expectations of all our mandates vary, and some require more detail than others: for instance, our emerging market mandates where we believe the identification of environmental, social and environment risks is particularly important when selecting stocks.
Once the guidelines have been set and the RfP has been created, our in-house selection team will work with consultants, including dedicated ESG consultants who provide additional insights on managers’ integration practices, to short-list prospective managers.
A panel, usually around eight people, will then assess the RfPs of the short-listed managers and score responses to each question. The scores are weighted and then summed to contribute to a manager’s overall score. The managers are ranked and moderated before approximately five managers are chosen to attend interviews with a chief pensions officer, chief investment officer and chief responsible investment and risk officer. We also actively encourage members of our investment committee to participate.
Finally, a full proposal is presented to the investment committee, who must approve the manager’s appointment. We aim to undertake a due diligence visit to the manager’s office in the early days of the mandate implementation. We like to examine their systems, see the portfolio manager, the ESG lead and other staff perform their daily tasks and see interaction between teams.
The chief investment officer and responsible investment and risk officer assess managers during every step of the process. The same officers are also responsible for the ongoing monitoring, which helps ensure that there is a good shared understanding of expectations.
What information do you source during the selection process?
During the selection phase, we look at track record, investment style and information related to what we summarise into the 6Ps:
- Philosophy their overall investment philosophy, including how they think integrating ESG factors adds value and how this is evidenced;
- Policies including ESG policies;
- People the people involved, their quality and any external resources used;
- Processes whether their investment process clearly integrates ESG into investment analysis and decisions;
- Participation in industry groups;
- Partners their willingness to see us as partners in delivering our investment strategy.
How do you assess the ESG integration practices of potential portfolio managers?
We ask managers to explain their technical capacity to take account of ESG issues at the expression of interest, request for proposal and interview stages.
Our mandates and RfPs explicitly set out our ESG expectations of prospective managers. Managers are required to demonstrate, among other things, their ESG policies, capabilities, track record and performance. We assign a specific percentage (10%-25%) of the overall score for each potential mandate and manager to their ESG capabilities and integration. ESG integration is also taken into account when scoring other areas, including the investment proposition, and the manager’s track record and pipeline.
At the interview stages, we discuss ESG integration with the key decision-makers in the investment team. Specifically, we request to interview: the fund manager who will be responsible for the portfolio on a day-to-day basis, the ESG lead and the client contact. We also analyse the client’s PRI Transparency Reports to validate responses and generate questions for on-site meetings.
What do you look look for when you are assessing potential portfolio managers’ ESG integration practices?
We look for evidence that demonstrates the managers are assessing the impact of any financially material ESG issues on the future prospects of investee companies or debt, and are taking this into account in their decisionmaking processes. It is therefore essential to have faceto-face meetings and discuss ESG integration with the portfolio managers and the ESG lead. The ESG lead should demonstrate that they can make an impact on investment decisions and that they are respected by the portfolio managers.
We also like to see evidence of managers assessing themselves on their ESG performance. It is a good indicator that a manager has strong ESG credentials if they produce their own reports on their ESG integration techniques and proactively discuss them with clients.
It is important to stress that what we look for depends on the style of the fund: for example, with active fundamental strategies, we would expect to see the fund manager produce their own research on ESG issues in companies, with systematic strategies the research would focus on process (say for example ESG metrics could be used) and with passive strategies the emphasis is more on stewardship activities.