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 monitoring process.
We have a policy to speak to managers once a quarter and to visit them and have them visit us once a year.
Every quarter, they will prepare a slide deck that contains information on their investment performance and risk, attribution analysis, holdings and ESG analysis. There is no questionnaire but the Global Equities team ask managers to complete a voluntary survey on their beliefs on climate change.
What information do you source during the monitoring process?
We are mainly concerned about what has changed since the last time we spoke and we want to understand what influences their stock selection and portfolio construction decision-making.
We would like to know if there were any major organisational changes and personnel changes (for instance any new staff, reduction in staff or changes to support staff), and if there are any changes to the investment process.
We are also very keen to understand what motivates the manager to buy a certain stock, how they deal with investment risks and what the process behind constructing a portfolio is. Examples of questions we ask are:
- Why is security XYZ in the portfolio?
- Please give examples where one or more of the 21 ESG risk factors influence an investment decision.
- You have a lot of energy exposure but not a lot of renewable companies. How have you been looking at the transition to a cleaner economy?
- This company is in a water stress region. Have you considered how water risk will impact its stock price?
- What are the main drivers of portfolio return?
- Why is there a lot of exposure to this sector?
How do you assess the ESG integration practices of your portfolio managers?
As well as regular meetings and onsite visits, we use thirdparty risk analytics tools. These tools help our internal managers to analyse the risk exposure of an individual manager’s portfolios and of our overall portfolio. The tools also encourage our internal managers to do research on ESG issues themselves.
The outputs of the risk analytics software tell us what the portfolio holds, and what the portfolio and individual securities risk exposures are, but they do not tell us to what degree ESG analysis is integrated into investment analysis or how it has contributed to investment performance. A manager may have got lucky by choosing companies that had good ESG scores and reduced the portfolio’s ESG risks, or a manager may have a robust system that considers ESG factors but they have made bad decisions.
However, the outputs of the risk analytics software are a good way to get the conversation with the manager going and can generate questions that will help identify whether a manager is successfully integrating ESG factors into their investment analysis, for example:
- According to our tool, the portfolio seems to have a high exposure to this ESG issue. Are you aware of that and how did you consider this ESG issue when analysing securities?
- We have identified a couple of securities in the portfolio that are rated badly on ESG criteria. Are you aware of that and how did you look at ESG risks?
Download the full report
A practical guide to ESG integration for equity investing