By Toby Belsom, Director, Investment Practices, PRI, and Felix Soellner, Senior Analyst, PRI
In light of the pandemic, the three signatory events we ran after the launch of the PRI’s guides on the incorporation of ESG factors into asset manager selection, appointment and monitoring (SAM) were online rather than in person. They provided a fascinating, valuable insight into the issues, challenges and practices of nine leading asset owners from North America, Europe, Africa and APAC.
This blog brings together and reflects on key findings from those webinars.
Takeaways for asset owners
- Ask for examples demonstrating that ESG leads directly to investment and corporate decisions.
- Utilise the investment management agreement (IMA) to reinforce your expectations and identify non-negotiables for ESG integration and portfolio reporting.
- A variety of tools are available to ensure portfolios are consistently aligned with your ESG mandate.
- Work with investment managers whose business practices and investment philosophy are aligned with your values, and then clearly communicate and set specific ESG expectations.
1. Manager selection
One question to ask asset managers: how have they embedded consideration of ESG risks into the culture of the firm?
Dave Zellner, Chief Investment Officer, Westpath
A consistent theme during the three discussions around manager selection was how asset owners identify and select a manager with a similar culture. One whose understanding of ESG issues aligns with their own and reflects that through investment—rather than just marketing —teams. Panelists identified exploring “real life” examples as the key to understanding how ESG factors are reflected in business-as-usual investment decisions. How have ESG factors really impacted forecasts, valuation models, analyst evaluations, investment decisions or portfolio weightings?
Looking outside the investment process, panelists also flagged the importance of “tone from the top”. As of 2021, the PRI’s Reporting Framework now requires signatories to complete a senior leadership statement. This should provide an interesting insight into C-suite commitment, something I am sure we will review in the coming year.
2. Manager appointment
The attestation approach puts legal burden on investment managers to make true and fair disclosures, and that the investment manager is repeatedly considering ESG factors
Alexis Cheang, Partner, Responsible Investment, Mercer
Appointing an investment manager establishes the formal relationship and is the foundation for the future partnership. PRI’s recent report on manager appointment flagged the need to include an asset owner’s expectations into legal agreements. This is still clearly the exception rather than the rule and most panelists do not currently incorporate ESG factors into their legal contracts. However, asset owners had utilised more informal mechanisms to incorporate aspects such as voting expectations, reporting requirements, alignment with stewardship codes, agreement around exclusion lists and annual KPIs.
Looking to the future, panelists flagged they expected commitments around net zero emissions targets to become more common in IMA documentation.
3. Manager monitoring
Do the preparation work before meeting and look at their portfolio for idiosyncratic risks in it
Kim Chong, Head of Risk Management and Compliance, Hong Kong Monetary Authority
All panelists had committed significant time and effort into developing suitable reporting procedures— including annual questionnaires or in-person discussions. Proxy voting records were cited as a key piece of evidence of policy in action. Evaluating a manager’s voting record on specific topics, how often they voted against management and a clear explanation of voting rationale all provided an indication of policy in action and alignment with an asset owner’s expectations.
4. Advice for asset owners
Make the first step. It’s a long road but we need to react and be active, not passive, in the adoption of ESG factors
Gabriela Luna, Deputy Director of ESG Analysis Administration, Afore XXI Banorte
We closed all the sessions with one question: what one piece of advice would you give to asset owners starting this process? “Be open to collaboration” was probably the most common theme in all the answers. Collaboration might be sharing ideas or leading practice—or it might be in the form of collaborating to shape real-world outcomes.
Another consistent theme was the need for asset owners to understand their own objectives, values and beliefs. Once these are clear, it strengthens an organisation’s ability to influence the mandate’s design. If managers do not understand or are not aligned with those principles or values, then the relationship is on rocky ground.
We were immensely grateful to the active participation of Meketa Investment Group, OPTrust, Swiss Re, Mercer, Wespath, Afore XXI Banorte, Hong Kong Monetary Authority, CalSTRS, Eskom Pension and Provident Fund and Aware Super.
- Sarah Bernstein, Principal, Consultant, Meketa Investment Group, Inc.
- Claudia Bolli, Head of Responsible Investing, Swiss Re
- Alexis Cheang, Partner, Responsible Investment, Mercer
- Kim Chong, Head of Risk Management and Compliance, Hong Kong Monetary Authority
- Kirsty Jenkinson, Investment Director, CalSTRS
- Alison Loat, Managing Director, Sustainable Investing & Innovation, OPTrust
- Gabriela Luna, Deputy Director of ESG Analysis Administration, Afore XXI Banorte
- Liza McDonald, Head of Responsible Investment, Aware Super
- Ndabe Mkhize, CIO, Eskom Pension and Provident Fund
- Dave Zellner, Chief Investment Officer, Wespath
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 firstname.lastname@example.org.