By Toby Belsom, Director, Investment Practices, PRI, and Diba Ahour, Analyst, Investment Practices, PRI
Responsible investment should be at the core of the relationship between asset owners and investment managers. More and more clients want it, regulators demand it and academic and industry evidence supports it. When I entered this industry in the mid-90s, I would never have expected this to become a competitive advantage and a minimum expectation – but it is now becoming mainstream. It explains why sharing practice on selection, appointment and monitoring (SAM) of external managers is so crucial for asset owners who are developing their approaches to mandates, RFPs or manager assessment.
These case studies reveal insights into leading practice from key practitioners and outlines innovative approaches to making ESG issues core to the relationship between asset managers and asset owners.
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Case study overview |
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After appointment, managers are scored along assessment categories. This score is tracked for improvement as Aware Super engages with the investment manager. |
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Brunel looks for specific examples of ESG integration and engagement, relating to asset classes and products as part of their manager due diligence. |
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Both investment managers’ and their portfolio companies’ sustainability footprints are measured and monitored. Cardano engages with managers to progress beyond a set of minimum standards. |
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Managers’ proxy voting practices are monitored and probed when divergent from established policies, peer practices and general best practice. HKMA engages with managers whose voting practices have come under question. |
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A proprietary manager scoring framework considering six pillars is used by Kempen to determine investment managers’ sustainability profiles at the selection stage, and to create bespoke products. |
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Man Group assesses hedge fund managers’ responsible investment credentials through due diligence, and scores hedge fund holdings using proprietary scoring that takes account of the investment management firms’ size. |
These case studies (and some of the key takeaways from three webinars on the same topics) reflect a variety of different approaches to due diligence, manager scoring and manager engagement.
RI questions in due diligence
Across all three of the webinars and some of the case studies, questions to probe and explore real-life examples of responsible investment practices were seen as a crucial starting point during due diligence. These examples enabled asset owners to see beyond policies and checklists and understand how these policies were implemented in practice (Brunel, Cardano, Man Group). Practical examples include RI governance (Man Group), or corporate engagement with portfolio companies (Cardano). There seemed to be a broad consensus that this kind of evidence quickly exposed greenwashing and marketing spin.
It is […] more important than ever that hedge fund investors can distinguish genuine responsible investment managers from those that greenwash
Man Group
Manager scoring
The case study providers and panellists at our three webinars utilised manager scoring on ESG issues at the selection and monitoring stage. Scoring processes are not uniform and asset owners tend to create proprietary scoring methodologies, frameworks and weightings to assess managers. Scoring was referenced in most of the case studies (Aware Super, Brunel, Cardano, Kempen, Man Group) and now seems to be a widespread practice.
Manager engagement
Engagement with managers after their appointment can result in a more collaborative relationship and a more aligned approach to responsible investment
Aware Super
The asset manager/asset owner relationship can last for years – it is one that has always involved client meetings, annual updates and occasional one-offs covering ongoing dialogue on relevant topics and practices. An asset owner’s approach or policy on RI may develop or change significantly after appointing an external manager, so engagement is an integral element of a successful on-going relationship. As ESG has crept up the asset owner’s agenda, ESG issues have increasingly started to be included on the agendas of these contacts. Some of the case studies outlined practices to improve managers’ RI practices over time (Aware Super, Cardano, HKMA).
The engagement process can feed into scoring assessments –highlighting which managers are responsive to requests and changing priorities and how this is reflected in key performance indicators and manager scores. One of the key RI metrics across some of the case studies focuses on voting– something tangible and easy to measure.
Alongside these case studies we have also been working on mandate design. As it sets the framework of the asset owner/asset manager relationship, it is an integral part of the selection and monitoring process. A key theme emerging in this piece of mandate research (to be published in the summer) is the importance of how managers ‘retrofit’ existing mandates. Asset owners might not want to change investment managers but certainly may have new requirements and expectations.
Like the combustion engine, asset managers without a well-structured approach to incorporating ESG into investment decision-making and stewardship are likely to be a dying breed in the coming years
Fiona Reynolds, CEO, PRI
We are extremely grateful for case study contributions. They play an important part in PRI’s ability to share leading industry practice. In this case this includes Aware Super, Brunel Pension Partnership, Cardano, Kempen, Hong Kong Monetary Authority (HKMA) and Man Group.
If other signatories would like to contribute further examples on this topic feel free to contact [email protected].
This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at [email protected].
