A growing number of asset owners now expect their investment managers to incorporate ESG factors into their investment processes. This means that ESG needs to be at the core of the relationship between the asset owner and the investment manager – and that ESG considerations need to be addressed at every stage of that relationship, from setting the initial investment strategy, to drafting requests for proposals, to selection, appointment and monitoring.

Thorough and consistent monitoring is critical to ensure the delivery of the terms and conditions on which the manager was appointed and that it is meeting the asset owner’s requirements. Regular monitoring of and reporting by the investment manager will provide the asset owner with insight and necessary detail to understand the manager’s approach to responsible investment, its alignment to the mandate and the investment management agreement (IMA), and to its stated investment principles.

Leading practice is developing quickly. The 2019 PRI Leaders’ Group provides examples from asset owners in our signatory base who have demonstrated leading practice in monitoring (see Box 1: The PRI Leaders’ Group). 

Box 1: The PRI Leaders’ Group

The PRI has identified The PRI Leaders’ Group 2019, which highlights asset owner leaders that have developed rigorous follow-up procedures to reduce reputational and management risk, and who have detailed policies for frequently monitoring managers’ performance through on-site interviews, calls and due diligence questionnaire (DDQ) reviews. Those leaders have set their own minimum criteria for evaluating manager performance; this guide seeks to promote similar monitoring across asset owners and investment managers, with the aim of streamlining and easing reporting. 

The aim of this manager monitoring guidance is to:

  • Promote consistency in reporting formats for both asset owners and investment managers;
  • Help asset owners understand if the manager’s approach to responsible investment is aligned with its own;
  • Reduce the number of variances in requests for information from investment managers; and
  • Promote comparability between managers.

This guidance should also help asset owners in structuring and compiling information from several investment managers for the purpose of reporting on ESG performance to clients and beneficiaries.

These guides are divided into five modules (see Figure 1). They should be read in conjunction and will act as a road map for asset owners to thoroughly embed ESG issues in their investment processes and in the relationships 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 monitoring guide toolbox