Asset owners increasingly include ESG considerations in their investment management agreements (IMAs) and other legal documentation. More than two-thirds (69%) of PRI asset owner signatories typically implement ESG requirements in contracts such as IMAs and limited partner agreements (LPAs).1 To ensure that investment managers abide by their clients’ ESG requirements, certain legal aspects are becoming standard features of the asset ownerinvestment manager relationship.
The PRI believes that ESG should be at the core of the relationship between the asset owner and the investment manager. To reflect the importance of these issues, clauses like those set out in the sample ESG clauses section of this document should be included in the agreements governing that contractual arrangement.
Regulatory requirements have started raising the bar for the IMA process, with some jurisdictions developing frameworks requiring investment managers to proactively address ESG considerations in the management agreement process.2 Industry-wide agreement on standardised terms in the contractual relationship will also facilitate the conversation for both sides and help manage expectations.
The PRI has produced guidance to help asset owners address responsible investment principles and ESG factors in their relationships with their investment managers. The guidance comprises of five modules (see Figure 1). They should be read in conjunction and will act as road map for asset owners to thoroughly embed ESG issues in their investment processes and at the core of the relationship between them and investment managers.
Module 1 describes a process followed by an asset owner to develop a responsible investment policy and strategy. This also includes the development of a strategic approach to asset allocation that incorporates ESG considerations.
Module 2 addresses the internal process of establishing mandate requirements, including key ESG considerations that will govern the investment manager, and drafting the RFP to reflect those requirements at a high level.
Module 3 focuses on the manager selection process to identify the investment manager that has the responsible investment attributes in place to meet the ESG requirements specified by the asset owner in Module 2.
Module 4 describes the manager appointment process to transfer the mandate requirements specified in the mandate into legal documentation.
Module 5 sets out a harmonised approach to investment manager monitoring, including tools and practical recommendations.
Investment manager appointment guide toolbox