Investment consultants advise on the investment practices of trillions of dollars worldwide. They are a recognised source of authority and knowledge. However, most consultants and their asset owner clients are failing to consider environmental, social and governance (ESG) issues in investment practice – despite a growing evidence base that demonstrates the financial materiality of ESG issues to portfolio value. There currently seems little commercial imperative for investment consultants to extend the coverage of ESG integrated services among their clients. Nor do we see pension schemes demanding ESG integrated services from their consultants. In too many cases, consultants and their clients simply don’t talk about ESG issues.
Neglecting ESG issues can lead to asset owners mispricing risk and making poor investment decisions. This is why effectively managing ESG issues is a core part of the fiduciary duties owed by asset owners to their beneficiaries. Investment consultants need to ensure that their asset owner clients navigate these challenges effectively if they are to retain their position as trusted advisers and if they are to grow and develop their future businesses, for example, in fiduciary management.
The PRI believes the full suite of investment consultants’ service delivery should be reviewed from an ESG perspective. Our aim is that this research drives a deeper discussion in the industry about the inclusion of ESG issues as a standard part of consulting advice and which new or additional ESG integrated investment services are needed. We will continue to review:
- Investment strategies and beliefs – The way that consultants and their clients publish investment strategies and beliefs, implement investment beliefs throughout the organisation and include ESG performance as a standard agenda item at performance review meetings.
- Asset allocation and portfolio construction – The way ESG risks and opportunities can be integrated into funding assumptions, asset allocation and portfolio construction, and how the service offering needs to evolve.
- Fund ratings – Inclusion of ESG questions in due diligence questionnaires and assessment of responses. All clients should be presented with ESG fund options.
- Reporting – Client reporting and inclusion of ESG performance reporting as standard.
- Fiduciary management – Full incorporation of ESG issues in fiduciary management, including in stock or fund selection, stewardship and active ownership, voting and reporting.
- Potential new ESG-integrated services to ensure provision of adequate ESG-related investment advice.
This shift is unlikely to occur without intervention. There are many barriers in market structure, industry practice, and policy and regulation that need to be overcome. Without addressing these barriers there will be little change in the advice provided by investment consultants.
The report sets out these barriers in detail and identifies a set of preliminary interventions that the PRI will develop over the coming months. Broadly, these ideas area:
- Improving incentives from asset owners – Enable small to medium and resource constrained asset owners to pool and clearly express their ESG service demands, develop quality standards and provide guidance on fiduciary management.
- Further developing investment practices – Develop ESG investment beliefs, assist investment consultants to develop more advanced ESG integrated services, publish guidance for asset owners on how to identify, select, appoint and monitor investment consultants and enable industry-wide expertise on ESG issues.
- Changing the policy and regulatory framework for investment consultants – Extend the PRI’s and UNEP FI’s fiduciary duty programme to investment consultants, work with professional bodies to incorporate ESG issues within regulation, support policy interventions to increase pension scheme pooling and put sustainability at the core of financial regulation.
We are now undertaking a consultation of asset owners and investment consultants to develop and extend the solution set and we welcome feedback, which can be sent to firstname.lastname@example.org.
The publication of this report (December 2017) marks the start of a consultation with asset owners, investment consultants and other investment intermediaries on the barriers to action and the potential solutions set out in this report.
The PRI will host a number of workshops in multiple countries to solicit feedback. We also encourage written feedback which can be sent to email@example.com. (Any feedback will be treated as confidential.)
Following the feedback we will identify, prioritise and sequence projects that we believe will help to achieve our vision of full integration of ESG issues as a standard part of investment consultants’ service delivery.
Download the full report
Investment consultant services review
Investment consultants services review
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