The Principles for Responsible Investment (PRI) has today launched new guidance for asset owners—Enhancing relationships and investment outcomes with ESG Insight—to assist them with ESG-related issues in the investment manager selection, appointment and monitoring process.

The PRI’s work in this area dates back to 2013, with the launch of Aligning expectations – guidance for asset owners on incorporating ESG factors into manager selection, appointment and monitoring.

Among others, this new document makes a fundamental point around manager selection: If there is no cultural fit and understanding of ESG factors between an asset owner and a potential manager, there is little fundament to establish a long-term investment relationship.

The guidance covers a number of critical areas including portfolio construction, engagement and voting, and reporting, in addition to looking at ESG scoring tools, highlighting considerations that asset owners should note when selecting managers, including:

  • when selecting an investment manager, asset owners should first look at the firm’s overall ESG alignment, then its capability in a specific asset class, and then a choose a suitable investment product;
  • an evaluation of a manager’s resources should also extend to the quality and suitability of its external vendors as a regular part of operational due diligence; and
  • one way to ascertain the effectiveness of an investment manager’s integration approach is to consider the price of an investment firstly with and then without ESG factors accounted for. Activities portrayed as “integration” often merely amount to simple screening, whereas integration done well is a powerful method of fundamental analysis.

“One of the most important ways that asset owners can drive responsible investment is by ensuring that the mandates they give to fund managers include requirements for analysing and reporting on ESG considerations,” said Kris Douma, director of investment practices and engagements at the PRI. “But too often asset owners fail to communicate these requirements to their managers, leading to a lack of clarity around ESG implementation.

Douma explains that the guide is not meant to espouse a “one-size-fits-all approach;” rather, it focuses on the interactions between asset owners and investment managers, and examines how ESG considerations can be implemented during the manager selection process. “Ultimately, if asset owners want the financial markets to take responsible investing seriously, they must clearly convey their ESG commitments when they select, appoint, monitor and reward investment managers.”

The PRI will release further asset owner guidance later in Q2 2018 on appointing and monitoring investment managers.

The full report can be found here