Asset owners and their fiduciaries need to understand and clarify the legal obligations towards their beneficiaries. These include fiduciary, ownership and other investor duties which, among other things, set out minimum standards for how ESG factors should be appropriately considered in setting an investment strategy. The asset owner should be aware of all relevant national, regional and international regulatory frameworks and standards which might impose such obligations and duties.
What is the role of investment consultants?
Advice on which fiduciary duties are relevant to an investor is ultimately a legal question. However, the investment consultant will have a role to play in helping the fiduciary convert those legal obligations into governance arrangements. They will bring their ideas and experiences of other clients’ approaches and views to help shape a governance framework that articulates the objectives of the asset owner’s investment strategy.
This framework might include definitions of the mission or purpose of the asset owner, translated into defined measures of investment return and risk. For example, a pension scheme might define its purpose to be the payment of accrued benefits, with a measure of return being the outperformance compared with a minimum-risk portfolio (for example the highest funding cost, lowestrisk approach), and a measure of risk being the volatility of the investments relative to the minimum-risk portfolio. The purpose of a savings plan might be defined as the achievement of a specific level of return above inflation, with returns measured as performance against inflation and risk as volatility against inflation. In both scenarios, the discussion about and choice of time horizon will be important in determining measures and the role of ESG factors.
In this way, the fiduciary duty is both articulated from a legal perspective and from an investment perspective; any factor expected to affect returns or risk (or both) should be investigated.
Question to ask the investment consultant
- How does the investment consultant take account of ESG issues in the advice that it provides to clients?
- What does the consultant understand is the asset owner’s fiduciary responsibility in relation to ESG?
- What are the advantages and disadvantages of an asset owner incorporating ESG issues into an investment process?
- What implications does that have for the asset owner meeting future liabilities and obligations over an appropriate timeframe?
Investment consultants and ESG: An asset owner guide
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Step 1 – Fiduciary obligations