Policy: Developing investment philosophy and policy
Content Finder - Step 1 - Policy
Investment Philosophy, Strategy And Policy Statement
Formulating the investment philosophy, strategy and policy is the responsibility of the Board of Trustees (and can be done with the assistance of the Asset Consultants). This is the first step within a pension fund’s overall investment process and helps define how the pension fund will create investment value in the context of future uncertainty, risk, and opportunity.
In order to develop their ESG-integrated investment philosophy, beliefs and strategy, Trustees must ensure a basic understanding of global and national ESG trends, the ESG factors’ impacts on sectors and asset classes, and subsequently how to address these risks and opportunities through related ESG investment strategies. In this regard, Trustees must also take a critical look at each asset class to evaluate where they may have most impact given size, liquidity, risk, returns and influence of the fund.
For further resources within this site please see ESG Topics for a deep dive on ESG trends and topics globally and in South Africa and Application of ESG Strategies Across Asset Classes.
Subsequently, the strategy is codified in the Investment Policy Statement (IPS) which reflects what the fund commits to doing on behalf of its beneficiaries and what it expects of others. This helps the board to ensure that all key stakeholders – including trustees, principal officers, consultants, service providers, members and regulators – have a correct and unambiguous understanding of the fund’s objectives and requirements on ESG integration, and are therefore able to see what this means for them in their respective roles.
An initial iteration of an ESG-integrated IPS can be the inclusion of a general statement of commitment to Responsible Investment and any specific frameworks that the fund is aligning with, such as CRISA or PRI. However the next iteration of the IPS should be a more detailed and comprehensive statement of the fund’s internal arrangements to integrate ESG in line with its investment philosophy, beliefs and strategy.
Common pitfalls in this process include skipping steps, lack of consensus/board-alignment, lack of detail/flexibility, or creating a strategy without sufficient consideration of how it will be implemented.
Additional guidance is available from investor networks and knowledge platforms such as the PRI and from suitably experienced investment consultants. When involving external advisors to develop the policy, Trustees should ensure that the board truly takes ownership of the final product.
Source: Adaptation from the Responsible Investment Ownership Guide (2013) and How Asset Owners can Drive Responsible Investment (PRI 2016)
- What are the ESG macro-trends and risks in South Africa and other countries where we invest?
- Which ESG topics should the pension fund (and its asset managers) be focusing on and why? See also the Key ESG Topics section of this tool
- What are the most material ESG risks and opportunities from the perspective of the pension fund’s investment portfolio and members?
- Which companies and industry sectors form the most important part of the fund’s holdings?
- What do we know about the ESG aspects of these companies and industry sectors?
- What have been the issues in the recent past, and what can we learn from this?
- What are the current issues and how is the fund (and its asset managers) addressing these?
- What ESG-related risks and opportunities do we face across our portfolio in the future, and what are we doing about this?
- Which ESG strategies should the pension fund (and its asset managers) be implementing and why? See also the Key ESG Strategies section of this tool
- Which ESG strategies are the fund and its asset managers already implementing and how?
- Is this being done efficiently? Is it having the intended result? How do we know this?
- What should we consider doing differently, or in addition?
- Are we being kept sufficiently well informed by investment consultants and asset managers?
- Who else needs to be kept informed of how the fund is implementing responsible investing and ESG integration?
- How well are we doing this? What feedback are we getting from these stakeholders?
- What proportion of our proxy voting rights is being exercised? How?
- What is the carbon footprint of the fund’s investment portfolio? How might this affect portfolio risk and portfolio return in South Africa’s shift to a lower carbon economy?
- What is the net social and environmental impact of our investment strategy? How can we achieve greater positive impacts in a manner consistent with our Asset Liability Management, risk/return requirements, etc.?
- How are we incentivising our managers to focus on the long-term performance and sustainability of our investments?
- How are our asset managers giving investee companies signals that encourage them to focus on long-term ESG issues? Is there too much focus on quarterly earnings?
- How can we support RI and ESG innovation and competition among service providers?
- How can we cooperate with other asset owners, investment entities, and others on strategic RI and ESG issues that are in our common interest?
CalSTRS was established in 1913 as the pension plan for California’s public-school educators. Since then the fund has grown to represent over 960,000 dedicated educators and their beneficiaries, and portfolio asset of $240 billion as of June 30, 2019.
“As a global investor CalSTRS models best practices in sustainable investment, employing risk-mitigating policies and dedicating resources to increase our members’ financial awareness and retirement security. Long-term value creation continues to be the essence of our commitment to the “Global Stewardship and Work” theme expressed in our annual reports.”
Jack Ehnes, Chief Executive Officer CalSTRS
Excerpt from CalSTRS Investment Belief Statements
Belief 7 – Responsible corporate governance, including the management of environmental, social and governance (ESG) factors, can benefit long-term investors like CalSTRS.
CalSTRS believes that, in addition to traditional financial metrics, timely consideration of material environmental, social, and governance (ESG), factors in the investment process for every asset class, has the potential, over the long-term, to positively impact investment returns and help to better manage risks. Proxy rights attached to shareholder interests in public companies are additional “plan assets” of the system. As a largely long-term investor, CalSTRS can enhance the value of its plan assets by taking a leadership role through voting proxies.
Belief 8 – Alignment of financial interests between CalSTRS and its advisors is critical.
In keeping with existing policies, guidelines, and procedures, CalSTRS is best served when there is contractual alignment and transparency of financial interests with its external investment advisors and managers.
Belief 9 – Investment risks associated with climate change and the related economic transition— physical, policy and technology driven—materially impact the value of CalSTRS’ investment portfolio.
CalSTRS believes that public policies, technologies and physical impacts associated with climate change are driving a transition to a lower carbon economy. As a prudent fiduciary and diversified global investor, CalSTRS needs to understand the transition’s impacts on companies, industries and countries and consider actions to mitigate risk and identify investment-related opportunities. CalSTRS recognizes the critical role that carbon pricing frameworks may play in integrating the costs of carbon emissions into the global economy to accelerate an orderly low-carbon transition and avoid exacerbating economic inequality and related geopolitical risks.
MN is one of the largest pension administrators and asset managers of and for Dutch pension funds providing integral asset management for nine Dutch institutional clients with total assets of more than EUR 130 billion.
“Responsible investment is one of the investment beliefs of MN. Investing responsibly and achieving excellent returns are not mutually exclusive. We believe in investing in well-governed companies in a way that minimises negative impacts on society and the environment and, where possible, makes a positive contribution.”
Karlijn van Lierop, Head of Responsible Investment, MN
Balance sheet thinking:
Investment strategy should be integrated into the overall funding and risk management strategy of the pension fund or insurance company (“the client”). The client’s funding objective, sponsor covenant and liability profile should form the basis for establishing the right risk and return objectives for the investment portfolio.
The long-term nature of the liabilities is a key consideration and typically implies a long-term investment horizon. That said, circumstances may occur that mean that short-term metrics also become relevant. It is therefore important to balance the opposing forces of short-term and opportunities with long-term objectives.
At all levels, the investment process should be disciplined and based on unambiguous assumptions in line with the client’s ultimate goals. It should be supported by an effective risk management framework which that allows decision making to be rigorously monitored and the investment process to be fine-tuned.
Investing responsibly and achieving excellent returns are not mutually exclusive. In fact, investments will generate solid returns in the long-run only if communities evolve in a balanced way. We believe in investing in well governed companies in a way that minimises negative impact on society and environment and, where possible, make a positive contribution.
Value is created by building an organisation with in-depth knowledge and experience of global markets, and draws on the expertise of a wide network of external partners.
Investors can achieve attractive risk-adjusted returns by being early adopters in emerging technologies and markets.
The following elements should be considered for an ESG integrated IPS :
Introduction and context and link to overall philosophy:
- Introduction and context, including explanation of how this policy links to the fund’s overall philosophy and strategy related to ESG.
- Explanation of RI and ESG definitions used.
- Reference to key national requirements and relevant international guidelines.
- Governance arrangements for the policy, i.e. who is accountable and who is responsible for its content and application, and review procedures and timelines.
- Scope of RI and ESG commitment, i.e. application to asset classes, internally and/or externally managed
Statement on monitoring of the priority ESG issues and their impact on assets:
- How the fund intends to monitor and evaluate the ongoing sustainability of the asset which it owns and which it is intending to acquire, including the extent to which ESG factors have been considered by the fund, and the potential impact thereof on the assets of the fund
- Position on E, S and G issues. These can be broad statements more fully detailed in separate policies or it can contain the detail.
- ESG investment approaches: i.e. how ESG strategies are used to determine asset allocation, if at all, and which ESG approaches the fund will implement in its investment analysis and decision making, e.g. ESG integration, themed investing, screening, active ownership etc.
- It is recommended that the IPS should state the key ESG related data and assessments expected from fund managers at the company level, including but not limited to aspects such as the following:
- The sum of tangible and intangible assets of a company.
- The quality of the company’s integrated reporting dealing with the long-term sustainability of the company’s strategy and operations. If integrated reporting has not been applied, due enquiry should be made on the reasons for this.
- The manner in which the business of the company is being conducted based on, for example, alignment with targeted investment strategies of the institutional investor and the code of conduct and supply chain code of conduct of the company.
Additional policies to be developed in more detail:
- Active Ownership Policy, which would typically include policy positions on voting and engagement and working in partnership (collaborative engagement).
- How Conflicts of Interest are managed (as recommended by CRISA).
- The IPS should ideally also indicate the mode and frequency for external reporting by the fund, including an established process to monitor compliance with the IPS.
Experience from other asset owners around the world illustrates that each fund should ensure that the policies it writes are appropriate and tailored to its own particular circumstances, size, aspirations and financial and wider objectives. Simply adopting a boilerplate ESG or RI policy or adapting slightly the policy of another fund will be unlikely serve the fund’s purpose.
Nevertheless, it is valuable to investigate how other investors have formulated their policies. The table below lists some examples of responsible investing policies from pension funds in South Africa and around the world. It will be clear from these examples that approaches to RI and ESG integration can be quite different, depending on the circumstances of each fund.
|GEPF||South Africa||Document Link|
|Sentinel Pension Fund||South Africa||Document Link|
|Universities Superannuation Scheme (USS)||United Kingdom||Document Link|
|BT Pension Scheme||United Kingdom||Document Link|
|Government Superannuation Fund||New Zealand||Document Link|
|New Zealand Superannuation Fund||New Zealand||Document Link|
|O P Trust||Canada||Document Link|
|CalSTRS||United States||Document Link|
Additional Policies: Active Ownership Policy and Conflict Of Interest
In addition to the Active Ownership Policy, the Code for Responsible Ownership and Investments in South Africa (CRISA), recommends that the Investment Policy Statement includes a policy on identification, prevention and management of Conflicts of Interest.
These various elements can be set out in separate policy documents, or can be addressed together in one policy document. Below are checklists and samples to help getting started.
Active ownership may include proxy voting or shareholder engagement (or both).
In line with the FSCA Guidance Note and international best practice, Trustees should make active ownership a strong feature of their ESG integrated policy.
Best practice for an engagement strategy and policy would be to have a systematic, strategic approach to engagement, underpinned by a rationale for which sectors and companies should be the subject of engagement, as established in the Investment Beliefs and overall Investment Policy Statement.
Another approach is for the engagement to be more ad-hoc or ‘reactive’, i.e. responding simply to news flow or major issues that arise. Trustees may start with the latter approach and evolve to the former approach.
There are several different ways to establish the fund’s approach to engagement:
- Establish an in-house policy to guide the fund’s direct engagement with companies in which it invests, as well as the engagement that appointed fund managers undertake on the asset owner’s behalf.
- Direct an appointed fund management company to develop an engagement policy tailored to the fund’s own needs and priorities.
- Accept an appointed fund managers’ existing engagement policy, which may, in fact, have been a criterion used to determine their appointment. Some asset management companies adopt engagement policies of their own accord, committing to engage with companies in all of their clients’ portfolios, on their behalf, as an integral part of the fund management service they provide. Sometimes engagement policies cover ESG issues, but sometimes they cover only environmental and social issues, with the governance and voting policy (or policies) being set out separately.
- Appoint a specialist engagement ‘overlay’ service provider to undertake engagement on its behalf. The pension fund may require the service provider to follow the fund’s own engagement policy or it can accept the approach and policy of the service provider.
CRISA provides the following additional guidance:
- An institutional investor should develop a policy dealing with ownership responsibilities. The policy should include, but not necessarily be limited to the following:
- Guidelines to be applied (e.g. King IV) for the identification of sustainability concerns, including at a company level.
- Mechanisms of intervention and engagement with the company when concerns have been identified and the means of escalation of activities as a shareholder if these concerns cannot be resolved.
- Voting at shareholder meetings, including the criteria that are used to reach voting decisions and for public disclosure of full voting records.
- Even if passive investment strategies are followed, active voting policies incorporating sustainability considerations, including ESG, should still be followed.
- An institutional investor should ensure implementation of the policy on ownership responsibilities and establish processes to monitor compliance with the policy.
- Where the institutional investor outsources to third party service providers, the onus is on the institutional investor as owner to ensure that the mandate deals with sustainability concerns, including ESG, and that there are processes to oversee that the service providers apply the provisions of CRISA when executing their mandate.
- The institutional investor should introduce controls that prevent it from receiving price sensitive information regarding a company or acting on such information in a manner that makes it an ‘insider’ in terms of the Securities Services Act No 36 of 2004. These controls should be applied when engaging with the company, and when seeking any information it requires, whether this is to fulfil its duties or to act within the guidelines of CRISA.
The guidance below focuses on active ownership in the context of the Listed Equity asset class only, as this is likely to be the most relevant priority for the majority of pension funds.
In general terms, a pension fund has three options in relation to proxy voting:
- Delegate responsibility for active ownership and proxy voting to investment managers.
- Appoint specialist proxy voting and/or engagement providers to implement active ownership commitments.
- In-house implementation.
Each of these options has its own set of pros and cons, and the right choice will vary from fund to fund depending on a variety of factors. Some good examples of proxy voting policies are provided.
In addition to the policies and procedures, for further reading on the real-world impact of Active Ownership:
PRI Active Ownership 2.0: https://www.unpri.org/investor-tools/stewardship
What should an engagement policy comprise?
First and foremost, an engagement policy should set out the rationale for engagement and the scope and limitations of that activity. An engagement policy should therefore be detailed. However, it is common for organisations not to publish very detailed policies (they often publish a short statement) even though a detailed version may exist internally.
A full or detailed engagement policy should include the elements set out in the following checklist.
The rationale for engagement
Define the reasons for engagement
Define the objectives to be achieved through engagement
How engagement links to the wider RI policy and/or other RI strategies
Define the engagement strategy.
Explain how engagement is to be used with other RI strategies.
Outline how the engagement policy relates to a wider RI policy, and/or Corporate Governance Policy, if they are separate.
Outline how information gained through engagement will feed into the investment process, if at all.
The scope of engagement
Highlight which investments the engagement strategy applies to. For example, does it apply to all regions in which the fund(s) invest? An engagement strategy should be global while recognizing differences in business cultures. Are there any exceptions to this?
The governance of the engagement policy and processes
State which body or person is responsible for ensuring that the policy is adhered to. For example, the board, Executive Committee or Investment Committee, or CEO, CIO or other person.
Outline whether any grievance procedures exist through which companies or other stakeholders may raise concerns with about engagement.
State how often the policy will be reviewed.
The resources committed to engagement
Define the resources to be committed to engagement. For example, will it be carried out by an in-house team, or outsourced to consultants or investment managers?
The engagement process to be used
Define the engagement processes to be used. For example, writing letters or emails, collaborative engagement with other investors, face-to-face meetings; filing shareholder resolutions
Outline policy on collaborative engagements, activism and in what circumstances, if any, publicity will be sought.
The issues/frameworks on which engagement will be undertaken
Define any international commitments, policies or frameworks that will guide engagement. For example, some funds set as their engagement framework the UN Global Compact. Others may choose to engage on issues relevant to their own mission. For example, a charity pension fund may prefer to restrict its engagement to the issues on which the charity works, such as human rights.
Responsibilities to investee companies
Outline how investee companies are viewed and how they will be treated throughout the engagement process.
Action to be taken when engagement fails
Explain what action the fund takes, and at what point, should engagement fail. For example, divestment or filing a shareholder resolution.
Accountability through reporting
Set out how engagement will be reported to clients. Bespoke reports will likely be needed for each client.
Set out how engagement will be reported externally
Define how often reporting will take place. For example, quarterly, half-yearly or annually.
|PIC||South Africa||Document Link|
|OMIGSA||South Africa||Document Link|
|Momentum||South Africa||Document Link|
|Ninety One||South Africa||Document Link|
|USS||United Kingdom||Document Link|
|New Zealand Superannuation Fund||New Zealand||Document Link|
|Ontario Teachers Fund||Canada||Document Link|
|MLC Superannuation Fund||Australia||Document Link|
- All of the circumstances and relationships that could potentially lead to a conflict of interest should be identified by the institutional investor and a policy for preventing and managing these conflicts should be developed.
- An institutional investor should ensure implementation of the policy on prevention and management of conflicts of interests and establish processes to monitor compliance with this policy.
Communicating the Policy (or Policies)
In addition, other good practices include sharing a draft for comment with key asset managers and other like-minded pension funds, and communicating with them on the final version of policies once the board has approved them.
Pension funds should also consider the most appropriate ways of communicating the Policy to its members. This may include, for example, the provision of a simple “Frequently Asked Questions” document to explain the fund’s responsible investing policy in non-technical terms that can be understood by workers and retirees of all backgrounds.
Additional details on disclosure and comprehensive reporting are covered in step 6.
- PRI (2018) Developing an active ownership policy
- Financial Sector Conduct Authority (2019): Guidance Notice 1 of 2019, Pension Fund Act No. 24 of 1956, Financial Sector Regulation Act, 2017: Sustainability of Investments and Assets in the context of a retirement fund’s Investment Policy Statement.
- CRISA (2011): Code for Responsible Investment in South Africa
- National Treasury (2020): Financing a Sustainable Economy, Technical Paper 2020.
- The King Committee (2016): The King (IV) Report on Corporate Governance for SA, 2016
- IOPS (2019): (International Organisation of Pension Supervisors) Supervisory Guidelines on the Integration of ESG Factors in the Investment and Risk Management of Pension Funds
- OECD (2017): Responsible business conduct for institutional investors – Key considerations for due diligence under the OECD Guidelines for Multinational Enterprises
- Cambridge University (2018): Embedding environmental scenario analysis into routine financial decision-making in South Africa
- PRI (2018). Asset Owner Strategy Guide – A guide to crafting an investment strategy which incorporates responsible investment considerations
- PRI (2016). Investment Policy: Process & Practice – A guide to help asset owners revise and develop investment policy, incorporating long-term factors such as ESG considerations.
- PRI (2016). How Asset Owners Can Drive Responsible Investment
- PRI (2020) Active Ownership 2.0: https://www.unpri.org/investor-tools/stewardship