An investment policy guides an organisation on investment decisions, asset allocation, ESG incorporation, how asset managers are selected and appointed, how active ownership is carried out, and how an organisation reports on its activities.
Investment policy sections
An introductory section sets out the context and objectives of the policy. It communicates the background for your policy revision, and sets expectations on how the policy will be adopted.
This section includes key terms as well as your view on how factors influence your investments. The clarity provided here forms the backbone of policy execution. Importantly, your organisation’s ability to monitor and control compliance will largely be set in this section. Definitions also establish policy credibility.
Purpose and scope
The purpose and scope of your organisation’s policy entails a high-level overview of what the policy aims to achieve; to whom is the policy binding; what specific asset classes, investment styles, regions, and markets the policy applies to; what ownership activities the policy governs.
This section stipulates the core objectives of and guidelines for your investment process, and how your organisation will incorporate ESG considerations within them. Their format may differ, depending on an organisation’s mission, geography, focus, resource availability, and internal competencies.
ESG governance should be as rigorous as any other governance under investment policy. A fully integrated policy calls for a robust governance approach. Governance upholds accountability, which makes the policy an effective tool for incorporating and mandating all investment considerations (including ESG) throughout your investment chain. Every responsibility needed to implement the various aspects of your policy must be accounted for, whether internal or external.
ESG incorporation approaches
The ESG approaches outlined here are in addition to those already incorporated in other sections of your policy, thereby ensuring that all ground is covered. They are not stand-alone approaches but rather a means to achieving the investment objectives. If other sections are providing sufficient ESG cover, there may be no need for this section.
Active ownership and engagement
By securing the alignment between investment decisions and active ownership activities, active ownership can be leveraged to improve the risk/return profile of the portfolio, to as great a degree as possible. It should not be seen as a stand-alone approach but rather a means to executing the investment objectives, and hence is best understood in the context of a central investment policy. Active ownership should swiftly feed into investment decision making, and vice versa, to make the most effective use of new information.
Full integration means including ESG considerations in your regular reporting framework. Reporting should be prepared for stakeholders, covering policy results and impacts. This means beneficiaries, trustees, and the public can help hold your organisation accountable to a newly incorporated policy.
Implementing the investment policy
Successful implementation should be prepared for as part of the policy revision process. Consider the following:
- strategic asset allocation;
- asset class strategy and mandates;
- stakeholder engagement;
- active ownership;
- manager selection, appointment and monitoring;
- reporting and transparency.
Monitoring and reviewing the investment policy
A clearly developed review process should answer the following questions:
- How well is the policy being implemented? Are the goals that were formulated in theory being achieved in practice? Do specific investment practices need to be developed further?
- Are investment policies remaining consistent with investment strategies?
- Do any internal/external factors require you to change how you incorporate ESG considerations into your investment policy? Are you expanding how you incorporate certain issues into your investment process? Have you expanded into new asset classes that are not yet covered by your policy?
- Are there any new legal requirements that you must follow?
- Are there any other influences that should be considered? For example, should recent peer activity lead to discussions regarding your own policy?
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Investment policy: process and practice
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Writing, implementing and monitoring an integrated investment policy