Step FOUR

Selecting Service Providers

Responsible Investment and Ownership Tool-Step 4



After revising the Investment Policy Statement (or Policies if several separate) to cover ESG, Active Ownership and Conflicts of Interest, a next priority for the Board of Trustees, is to ensure that this is executed by its Service Providers.

This section provides an overview of the selection process and checklists of questions to ask service providers.

Selecting Service providers

After revising the Investment Policy Statement (or Policies if several separate) to cover RI, Active Ownership and Conflicts of Interest, a next priority for the Board of Trustees, is to ensure that this is executed by its Service Providers.

Accurate and effective selection, appointment and monitoring of asset consultants and asset managers is critical. This includes incorporation of ESG considerations into Appointment Letters and Investment Mandates.

An overarching relevant question to ask is also whether service providers are registered with PRI and/or adhere to principle contained in CRISA. If they are registered, are they actively participating and what is the impact of their participation on the work that they do for the fund.

Many Boards of Trustees work extensively with investment consultants on various aspects of their fund management.

Historically, asset consultants have often based their RI advice on a narrow interpretation of investment objectives. However, increasing amounts of data on the link between ESG and investment performance is showing that neglect of ESG issues can lead to asset owners mispricing risk and making poor investment decisions.

While the major consulting firms now have RI specialists, or teams focused on responsible investment, these are usually established as separate advisory centres rather than being integrated into all investment advisory services. This results in ESG being an additional service and cost. However, conversely, a common point of feedback from asset consultants is that pension funds rarely raise responsible investment issues with them, which limits their willingness to integrate responsible investment into their mainstream service offerings.

Therefore, when appointing investment consultants and legal advisers, Trustees should ensure that the services they get from their consultants, whether covering specific assignments or the full-service suite, are aligned with their own responsible investment objectives, strategies and policies.

This includes making sure that the investment consultant’s senior management team and the business as a whole are committed to integrating RI into investment services and that they have the required resources, competencies and experience to ensure that the pension fund is fulfilling their fiduciary duty to beneficiaries.

The guiding questions below are intended as a menu for Trustees to choose from, according to which areas are most relevant to them. Consultants should be prepared to explain their approach and to offer solutions.

Consultants’ answers to the questions will provide the basis for a gap analysis that can be used to compare consultants, or for an in-depth conversation on missing area

In the South African investment system, investment consultants are the key actors. Many asset owners rely on their consultants to bring relevant issues to their attention. However, most consultants are not actively supportive of ESG or responsible investment and so, in the absence of explicit demand from their clients, tend not to proactively raise the issue. Asset owners need to proactively engage with investment consultants and they should require them to explicitly look at ESG and responsible investment when evaluating and recommending investment managers.

Isaac Ramputa, Chairperson, Batseta

This checklist has been adopted from the Responsible Investment and Ownership Guide (2013) and the PRI publication Investment Consultants and ESG: An Asset Owner Guide (2019).

In the investment process, the asset consultant typically advises on some or all of the elements in following two main areas:

  • Investment strategy – including defining of fiduciary obligations; formulation of investment principles, and strategy and investment policy.
  • Fund manager selection – including mandate formation; research and long-lists; requests for proposal; screening and shortlist; appointment.

This checklist provides some key questions to consider in terms of assessing the ESG capacity of asset consultants in these areas.

Investment strategy

Fiduciary obligations

Questions the pension fund can consider when assessing the ESG capabilities of investment consultants:

  • How does the investment consultant take account of ESG issues in the advice that it provides to clients?
  • What does the consultant understand is the asset owner’s fiduciary responsibility in relation to ESG?
  • What are the advantages and disadvantages of an asset owner incorporating ESG issues into an investment process?
  • What implications does that have for the asset owner meeting future liabilities and obligations over an appropriate timeframe?
  • What capabilities do they have in Responsible Investing? Do they have dedicated RI staff?
  • What are their beliefs on RI and ESG risks and opportunities?
  • How long have they been evaluating ESG and RI?
  • What thought leadership can they offer and what ideas?


Investment principles and beliefs

Investment consultants often play a key role in the development of investment beliefs or principles. They can guide and facilitate the asset owner through a process of discovering and articulating its investment principles. They can provide evidence that helps the asset owner reach a conclusion on specific principles (e.g. on the sources of investment performance or outperformance, or on the role of ESG factors in investment strategy).

Investment principles can become granular. A good consultant should be able to provide a framework for discussing and workshopping beliefs based on appropriate evidence, and be able to summarise them effectively.

Questions:

  • Does the investment consultant have a set of its own principles in relation to incorporating ESG considerations into its business practices and advice to clients?
  • Does the investment consultant have a structured process it follows to help clients develop their investment principles?
  • Can the investment consultant provide one or more examples where a client adopted ESG issues into their investment principles due to the consultant’s advice? What were the (dis)advantages or drivers for the client adopting such principles?
  • If a specific client ignored the investment consultant’s advice in relation to ESG incorporation, what was the key reason for this decision?


Strategy formulation

Investment consultants can help asset owner clients translate their beliefs or principles into formally measurable ambitions and criteria expressed in the investment strategy, including how ESG issues are to be taken into account.

They can conduct scenario and other investment modelling to inform the asset owner’s decision on the investment strategy across the available investment universe. Consultants can advise on which asset classes, sectors and geographies should be focused on. They also advise on the ESG investment strategies and products available.

They can provide examples of strategies that have been adopted by other asset owners, including examples of how ESG issues have been taken into account and of how these have affected investment performance and wider organisational objectives.

Questions:

  • Does the investment consultant have a structured process to help clients take account of ESG issues in their investment strategy?
  • If the investment consultant provides advice on portfolio construction that incorporates ESG issues, how are these issues integrated into tools and services, such as portfolio modelling and scenario planning?
  • How does the consultant assess and measure the ESG impact of the portfolio? And how is this integrated into the investment strategy?
  • Can the investment consultant provide one or more examples where clients adopted ESG issues in an investment strategy due to the consultant’s advice? What were the (dis)advantages or drivers for the client adopting such a strategy?
  • If a specific client ignored the investment consultant’s advice in relation to ESG incorporation, what was the key reason for this decision?


Investment policy and governance

The specific role played by investment consultants will depend on the systems and processes that the asset owner already has in place and on previous work it has done on ESG-related issues. Investment consultants can help develop investment policies that codify the asset owner’s investment strategy in relation to its investment decision-making and asset allocation processes, and its approach to ESG incorporation, active ownership, manager selection and monitoring.

Questions:

  • Does the investment consultant have its own policy that mandates ESG considerations into its advice to clients and, if so, how is it integrated into its service offering?
  • Does the investment consultant have a structured process or template it follows to help clients develop their investment policies?
  • Can the investment consultant provide one or more examples where clients adopted ESG issues in an investment policy due to the consultant’s advice? What were the (dis)advantages or drivers for the client adopting such a policy?
  • If a specific client ignored the investment consultant advice in relation to ESG incorporation, what was the key reason for this decision?


Fund manager selection

Capabilities in fund manager selection

Given their extensive knowledge of the investment management universe, investment consultants are often relied on by their asset owner clients in the asset manager selection process. Below are guiding questions to ask the investment consultant related to their capabilities in asset manager selection.

  • Do they survey RI practices of asset managers alongside standard metrics?
  • What about manager ratings – are they able to assess the ESG capacity of fund managers?
  • How do they evaluate an RI fund, i.e. the product?
  • What conclusions are they drawing, what do they think the gaps are?
  • How do they ensure they have up-to-date access to international good practice (including examples of RFPs, management agreements, manager evaluation frameworks, etc.)?
  • Have they conducted successful RI searches?
  • Do they have off-the-shelf research on RI manager and strategies?

Further detailed questions applicable to fund manager selection process are detailed in the Asset Manager Selection Checklist.

Manager selection is a core component of pension funds’ investment process. Trustees often engage the asset consultants to help with this step, but it should be noted that ultimate responsibility for manager selection sits with the Board of Trustees.

Pension funds (with the help of asset consultants as appropriate) should define the types of mandate that fit their ESG requirements as formulated in the IPS and aligned with the asset owners’ investment principles and strategies.

Asset managers should either offer tailored products in accordance with the pension fund’s investment preferences, i.e. as stated in the IPS – if running a separate client account – or offer existing products that can fit within the asset owner’s investment preferences, potentially in combination with others, (i.e. under a pooled mandate for retail / umbrella funds).

Selections require thorough due diligence of the manager’s investment approach and performance, investment process and portfolio construction decisions, as illustrated below.

Once selected, pension funds should require investment managers to report regularly on: 

  • how they have taken account of ESG issues in their practices and processes
  • the investment decisions that have been made as a result of ESG integration, and
  • how this has affected investment performance.

In turn, pension funds should also provide feedback to their investment managers on how they are performing against the pension fund’s beliefs and policies, and they should encourage investment managers to continuously improve their practices and processes.

The pension fund should also seek to align interests through fees, pay structures and other incentives. High-performing investment managers should be rewarded, whether through strengthened relationships with existing clients or through winning new mandates. Criteria can include product innovation, quality of ESG integration, and quality of engagements with companies and issuers.

Source: Adopted from PRI (2018). Asset Owner Manager Selection Guide, Enhancing Relationships and Investment Outcomes with ESG Insight

The following checklist is a summary from a PRI publication: Asset Owner Manager Selection Guide: Enhancing Relationships and Investment Outcomes with ESG Insight (2018).

Split in two parts, it provides guiding questions that help Trustees and/or their asset consultants to assess an asset manager’s culture, investment approach and objectives, investment policy, time horizon, asset classes, and investment products.

Questions to explore

Firm culture

If there is no cultural fit and understanding of RI between an asset owner and a potential manager, there is no foundation to establish a long-term investment relationship. However, culture is an ambiguous concept. Key components include manager ownership and management alignment with the incentive structures, beliefs and values of decision-makers.

For example, it is important to find out whether a firm’s culture is distribution-led, with incentives related to asset accumulation, or investment-led, with incentives reflecting investment outcomes.

Questions:

  • What is your overall investment philosophy, including how you believe incorporating ESG factors adds value? How is this embedded throughout the organisation?
  • What is your investment style and philosophy and how are these incorporated into your strategy?
  • Please describe how your organisation incentivises staff. Is ESG insight considered?
  • Are you a long-term manager that is able to perform within the chosen investment time frame?

 

Investment approach and objectives

Questions on investment approach and objectives should shed light on how an asset manager produces value through ESG insight.

Understanding the business and investment philosophy of a prospective manager enables asset owners to ascertain whether such an approach is in line with their own objectives. Investment objectives usually differ across managers, strategies, funds and products. Asset owners will encounter high-level statements and more specific objectives closer to the product level during the selection process.

The most straightforward approach would entail ESG incorporation being part of a management firm’s overall investment objectives and reflected across all activities and products. When preparing for the manager selection process, reflect on:

  • How your (the pension fund’s) strategy and policies constitute an approach that considers ESG factors.
  • How you as a pension fund plan to align a manager’s investment approach with your strategy and policy, and what alignment means to you.

 

Questions to explore investment approach and objectives at the asset manager firm level: 

  • Please outline how your investment approach is informed by global trends, including those related to sustainability
  • Please describe how and to what extent ESG risks and opportunities are incorporated into your approach.
  • What would you say are your competitive ESG strengths relative to your peers?
  • How do you operationalise a broad fiduciary duty concept (cognisant of ESG factors) in your investments?
  • What are your objectives for ESG incorporation in your investment approach?
  • How do you ensure that ESG issues are embedded and systematically feed into all investment decisions?
  • How do you review and update your investment approach? How do you monitor the relevance of your approach in a changing investment environment?
  • Do you use an ESG index benchmark or a standard benchmark with added ESG requirements?

 

Questions to explore investment approach and objectives at the product level

  • How will you ensure that the product aligns with top-level firm approaches?
  • Are all firm-wide objectives and approaches applicable to this product? If not, please explain why.

 

Investment policy

An investment policy should reflect a pension fund’s strategy and views on best practice in managing investments, including incorporating ESG factors. An asset manager’s written investment policy should define what ESG means to them in practical terms.

An assessment of the policy should indicate whether it is compatible with an asset owner’s ESG-related definitions and expectations. Asset owners should compare the policies of prospective managers, which is not always an easy task as they must assess how managers address ESG factors as well as how policies are adhered to.

Questions to explore policy at the firm level:

  • Do you have a firm-wide investment policy that incorporates ESG considerations, or a separate ESG or responsible investment policy?
  • If the policy’s ESG elements are not firm-wide, which parts of the firm do they cover?
  • Which policy definitions do you use for ESG factors across the firm?
  • How often is your policy reviewed and has your approach to tackling ESG issues evolved over time?Questions to explore codifying policy strategy at the product level:
  • If you have a product or asset class policy, does it align with the organisation-level policy and/or have a clear link to your firm’s investment approach and objectives?
  • How might ESG incorporation regarding this product change due to evolving (responsible) investment policies?


Investment time horizon

An asset owner’s ESG-related objectives should translate into investment decisions with appropriate long-term time horizons. For example, it can be difficult to achieve positive real world impact and reap competitive returns with a high turnover, short-term product as ESG factors tend to play out over a long period of time.

This also holds true culturally; for example, short-termism can manifest in unnecessarily heavy trading patterns reflecting a firm’s management style. While short-term metrics may be relevant at times, short termism is neither desirable nor conducive to responsible investment.

High churn is likely to complicate active ownership and make any positive real world impact or ESG risk reduction difficult to monitor. Asset owners must be aware of this when selecting managers.

Questions to explore investment time horizon at the firm level:

  • Do your internal incentive structures encourage long-term investment?
  • Please describe how long-termism has informed your investment strategy, approach, policies and processes.
  • How has your organisation resisted short-term pressures?
  • Please give examples of how you promote the long-term success of the companies you invest in.
  • How do you foster a culture of long-term investment decision making at your firm?
  • Are your ESG objectives clearly defined and within the appropriate time frame?
  • Are you aware of, and aligned with, our investment time frame?

 

Questions to explore investment time horizon at the product level

  • How do your ESG objectives match the investment time horizon of this product?
  • Please give examples of how you have promoted the long-term success of the companies in this portfolio.
  • Please outline how portfolio manager and investment staff remuneration reflects the long-term value creation mandate of this product.
    How does the portfolio construction process resist short-term pressures?

PART 2 – Competency across asset classes and execution of investment products

Asset classes 

An investment manager may not have the same level of RI competency across all asset classes. Manager firm level practices may also not be fully suitable for all asset classes due to style, culture or resources. When selecting an investment manager, asset owners should first look at the firm’s overall RI alignment, then its capability in a specific asset class, and then choose a suitable investment product.

 

Questions to explore asset classes at the firm level:

 

  • Which asset classes does your ESG framework or policy cover?
  • Does your investment approach, ESG staffing and philosophy vary among asset classes?
  • How has ESG incorporation evolved at your firm? Which asset classes did you cover first?
  • How do you incorporate ESG issues in the asset class we target?
  • What is the depth of ESG product offering in the asset class we are interested in?
  • How does that compare to other asset classes

Investment products: Portfolio construction and investment decision making.

Product-level information with examples of ESG application to portfolio holdings should be assessed. Typically, this is an area where true understanding can only be gained from well-executed dialogue.

Investment managers must ensure that investment processes incorporate ESG analysis, and that such insight is presented to investment decision-makers (and that those decision-makers are able and empowered to act accordingly).

Pension funds should verify that final decision-makers use available ESG material and organisational insight in their investment decisions and also explain what impacts this is expected to have. They should also ask prospective managers to support any claims with evidence and real examples.

For example, if a product needs to be managed with the objective to remain within a +2 degrees scenario, an investment manager would need to demonstrate how this is being adhered to. In cases where ESG incorporation requires a higher degree of judgement by the investment manager, measuring compliance against an asset owner’s ambitions and objectives is more complex.

Pension funds must understand if there are tangible metrics to evaluate ESG compliance, and work on creating them if they do not exist. This is a complex process for which a descriptive approach would be inappropriate. Elaborating on the process and using measures of judgement and best practices would be a more effective approach.

Finally, in portfolio construction, parameters like tracking error are important as they directly influence choice of investments, but may not be critical.

Please see Common Questions: How  well established is the link between ESG and investment performance. for further detail.

Questions related to screening and normative products: 

  • Do you have an ESG exclusion or inclusion list, and what governs these exclusions?
  • Do you remove companies from the portfolio for non-compliance with the ESG policy?
  • Do you blacklist countries and issuers, and which issues do these relate to (e.g. corruption, corporate governance, etc.)?
  • Please describe how you merge financial and ESG criteria during investment analysis.
  • How often do you review the ESG risk exposure of the portfolio and how often have you changed the investable universe based on those findings?
  • Please give five examples of how ESG issues have influenced investment decision making.
  • How do you foresee ESG issues influencing investment decisions?
  • What challenges do you anticipate in your ESG integration approach?
  • How do you interpret our ESG or responsible investment objectives, and how would you execute investments that are aligned with our beneficiary demands?
  • What ESG data, research, resources, tools and practices will be used to incorporate ESG factors into the investment processes, valuations and other investment decisions you make for this product? What are the main ESG factors affecting the portfolio and why is this the case?
  • How will you ensure that all material ESG data available at the firm-level will be used to benefit this product?

Questions related to active ownership products: 

Active ownership in the form of proxy voting and engagement are crucial elements of ESG integration in South Africa, sample questions to ask fund managers:

Questions to explore engagement at the firm and product level:

  • How do you engage with companies on ESG issues?
  • Is the engagement process structured or is it handled on a case-by-case basis?
  • How do you use ESG portfolio information to identify opportunities or targets for engagement?
  • How do you ensure ESG factors are integrated into investment decisions, including insight gained from engagement activities?
  • Please give evidence of a connection between active ownership activities and portfolio-specific alterations in investment decisions.
  • How will you engage with companies on ESG issues for this product if it differs from your firm-level practice?
  • How does information from engagement affect investment decisions for this product? Please give examples.
  • How are you planning to use engagement service providers for this product, and how will you ensure they meet our needs?
  • If you use service providers as consultants, do you have a policy to provide focus for those providers and clearly outline what is expected of them?
  • Would you consider disinvesting from a company that does not respond to shareholder engagement?
  • What are your service provider’s commitments regarding ESG expectations and are they able to handle differences among various asset owners’ policies?

Questions to explore voting policy and voting outcomes at the firm level and product level:

  • Do you track which strategic changes in corporate actions are attributable to voting outside the default options, e.g. a vote against a general AGM agenda item?
  • Do you evaluate proposed company directors before the AGM/EGM? What process does this involve?
  • What actions have you taken to support ESG related director appointments or to remove directors associated with ESG-related failures?
  • How will you ensure that our policy is adhered to in all situations?
  • Have you (co-)issued any shareholder resolutions at AGM/EGM events? Please give some examples, and the results of the resolution.
  • How will you act in a situation of misalignment between your standard voting policy and ours?
  • Are there are any voting options you do not want to implement in your own name?
  • Have you supported previous activist stances by other investors with regards to board nominations and proxy access? Please give examples.
  • How may I vote against director appointments in the context of this product?
  • What capacity to evaluate company directors will be available for this product?
  • Please explain how information acquired from voting is translated into investment decisions, with examples of previous cases.
  • Are the results of those votes public or private, and are they measurable?
  • If you vote on behalf of asset owners, what has been the track record of voting against management? What process led to that vote?
  • Would a responsive management team, which acts on your voting, lead to a larger allocation to the company versus its peers?
    How much say will we have when it comes to disinvesting or reducing allocation from our portfolio in the context of this product?
  • How will you measure specific engagement results for this product? Will they be publicly available?

Risk and return Framework

Investments always have real economy impacts that can be positive and/or negative (for example, they may increase or decrease pollution levels, generate corporate and income taxes, support employment or create discrimination) and are intertwined with long-term systemic issues and prosperity.

Pension funds that limit analysis to purely short-term financial risk and return are missing a crucial element in their portfolio’s contribution to end beneficiaries and society at large.

Clarity on real economy impact expectations during the selection phase will help to align interests for a productive long-term commercial relationship. Asset owners must also be clear about what risk means to them at each level of the investment process, and how it can vary across the portfolio.

Risk:

There are myriad views on and definitions of risk. For example, an asset owner may perceive risk as the likelihood that a result does not align with its long-term investment goals or as surplus risk.

For a long-only investment manager, risk is usually associated with deviation in return versus a benchmark. For an absolute return fund manager, risk is often defined as not meeting a fixed return target.

Asset owners must be clear about what risk means to them at each level of the investment process, and how it can vary across their portfolio.

This is particularly important as measures of risk linked and monitored in manager relationships for investments within a portfolio may not always reflect an asset owner’s long-term goals and overall plan perspective.

An asset owner’s ESG or strategic risk framework needs to be embedded in mandates and followed through in the selection process.

With expanding understanding of risk premia and sophisticated portfolio risk analysis, asset owners are more able to uncover ESG relationships with all traditional risk measures.

The selection process should test a manager’s ability to supply relevant analysis.

Questions to explore risk framework at the firm and product level:

  • What issues can materially impact your investment performance and why? Which risks do you monitor through your firm’s research?
  • How do you monitor long and short-term risks and their investment relevance? Is your risk function trained and resourced adequately to identify ESG related risks?
  • What are the major ESG risks you identified in individual holdings and what are you doing to mitigate them? Can your investment teams access thematic ESG risk research?
  • How would you respond if you identified an investment with significant ESG risks?
  • How do your views on minimising reputational risks align with our views and product policies and terms?
  • How will you mitigate ESG risks in holdings? How does the product benefit from firm-level risk research?
  • How will you minimise or eradicate reputational risk?

Returns:

Returns alone and ESG outcomes specifically are treated and targeted in different ways by asset owners and investment managers.

This may be due to differing commercial strategies, investment competency, legal, fiscal and tax systems, and may also reflect alternative perceptions of fiduciary duty.

Questions to explore return framework at the firm and product level:

  • How do you monetise future financial returns by participating in megatrends?
  • How do you integrate externalities into your investment return framework?
  • Are ESG factors assessed as part of the financial return or separately?
  • How will the ESG performance of investments impact your financial models and company valuations?

Further detailed questions on how to assess investment products are available in the publication by PRI Asset owner manager selection guide: Enhancing relationships and investment outcomes with ESG insight (2018), including for thematic and screening processes, integration, impact investment, and for the practices of securities lending and derivatives.

The CalPERS side letter requires investment managers to incorporate environmental, social, and governance factors into investment processes and report on those factors on a regular basis, in addition to responding to any CalPERS questions related to the same.

James Andrus, Investment Manager, CalPERS

Investment mandates are critical to defining the relationship between the asset owner (in this case the pension fund/Trustee) and the asset manager. Mandates influence manager behaviour and help define an asset owner’s ability to project its investment preferences into investment practice.

Addressing RI in existing mandates: 

As investment mandates are generally structured over several years, there is limited opportunity for asset owners to change contract requirements during the term of the mandate. However, several steps can be taken during that time. A pension fund may:

  • Share its new ESG integrated policy with its asset managers (ideally having consulted them during its drafting)
  • Ask its asset managers to provide information on what they currently do to address ESG issues and active ownership in their investment process.
  • Provide asset managers with a clear explanation of the expectations that the pension fund is placing on them, and how these expectations are likely to evolve and become more formal over time. As the pension fund’s RI expectations will not be contractual at this point in time, it may be useful to set out a series of practices that the pension fund would like its service providers to adopt, and to then seek agreement (or confirm alignment) on a voluntary basis.
  • Request asset managers to provide periodic updates on their RI activity (e.g. quarterly, semi-annually or annually).
  • When investment mandates come up for renewal, make sure that RI considerations are built into the review and or re-appointment process.
Integrating RI into new mandates:

Asset owners have much greater latitude to integrate RI requirements into new mandates.

The following key points should be considered in the mandate formation:

  • the asset owner’s investment principles and policy as the overall guide;
  • requiring that managers include ESG issues in their investment research, analysis and decision-making processes;
  • specifying time horizons and risks to portfolio goals;
  • asset class or investment style specific expertise;
  • active ownership on ESG factors;
  • reporting requirements regarding the manager’s actions and outcomes achieved, including ESG factors throughout.
  • When providing AMs with the relevant policies, proxy voting and engagement strategies are particularly relevant in the SA context given the large allocation to listed equities and the limited universe of investments.

 

RI considerations can and should be integrated into investment management agreements (IMAs).

Relevant clauses can include:

  • Requirements and/or targets relating to ESG integration
  • Requirements and/or targets relating to ESG exclusions in mainstream portfolios
  • Requirements and/or targets relating to engagement
  • Requirements and/or targets relating to voting
  • Reporting on the impact of ESG issues on financial (or portfolio) performance and/or the ESG characteristics of the portfolio
  • Performance fees dependent on ESG delivery
  • Break or renegotiation clauses in the event of a significant change in the organisation’s RI capabilities, resources, approach or performance

See sample clauses for consideration in the ICGN model mandate letter.

International progress on RI is producing a growing number of examples and templates for the incorporation of RI into RFPs and investment management agreements. This is a continuously developing space and new resources are becoming available all the time. Pension funds and their consultants should consider the Model Mandate Initiative of the International Corporate Governance Network (ICGN), as well as guidance available from PRI and CRISA.

As per the International Corporate Governance Network’s (ICGN) Model Mandate Initiative more investment mandate clauses to be applied as relevant can be found in Model Contract Terms, Section 3. Exhibit A)

Sample clauses for incorporation in Mandate Letters:

ADOPT INVESTMENT BELIEFS AND POLICIES:

In carrying out its duties under this agreement, the Investment Manager will manage the client’s portfolio in line with the client’s investment beliefs and responsible investment policies, copies of which are attached as Appendix 1 to this agreement. And if applicable: The manager will also ensure the portfolio is managed in line with the Principles for Responsible Investment, to which the client is a signatory.

STEWARDSHIP:

The Investment Manager will be an active owner, implementing a programme of engagement and, where relevant, voting, aligned with the Client’s responsible investment beliefs and policies (copies of which are attached as Appendix 1 to this agreement). The Investment Manager will agree engagement priorities with the client on an annual basis. Where appropriate, the Manager will provide the Client with the opportunity to join company meetings. The Investment Manager will participate in, and promote, stewardship codes in countries relevant to the investment portfolio. The Investment Manager will report annually on the financial outcomes and the environmental, social and governance outcomes that have resulted from these activities, The Investment Manager will also report on how stewardship activities have influenced its investment decisions.

PUBLIC POLICY ENGAGEMENT:

The Investment Manager will allocate resources to public policy engagement on responsible investment-related issues, in line with the Client’s investment beliefs and responsible investment policies, copies of which are attached as Appendix 1 to this agreement. The Investment Manager will agree engagement priorities with the Client on an annual basis, and will report annually on progress against these priorities.

REPORTING:

In addition to the specific reporting requirements above, the Investment Manager will report annually on:

  • The staff and other resources it has for the implementation of its responsible investment commitments and for the analysis of ESG issues;
  • How its compensation structures align with the objectives of the mandate;
  • The internal and external ESG research it uses in its investment research and decision-making, including information on its chosen research providers and on research expenditures;
  • How its responsible investment and ESG-related activities (investment research and decision-making, active ownership, policy engagement) have affected the underlying value and strategy of the portfolio. The Manager will allow access by the Client to its staff and systems to monitor ESG integration in investment decision making.

 

INTEGRATE ESG ISSUES INTO INVESTMENT DECISION-MAKING:

Consistent with its fiduciary duties and with the client’s investment beliefs and responsible investment policy (copies of which are attached as Appendix 1 to this agreement), the Investment Manager will establish a structured process for integrating environmental, social and governance issues into its investment processes and decision-making. The Investment Manager will ensure that its staff apply due care and diligence to following this process The Investment Manager will report annually on the implementation of this process and on how the analysis of environmental, social and governance issues has influenced investment decisions and portfolio performance.

ALIGN INVESTMENT TIME-HORIZONS

The Investment Manager will have a process for monitoring current or potential investments in relation to relevant long-term factors such as ESG concerns. The Investment Manager will ensure that its staff apply due care and diligence to applying this monitoring process, including considering the extent to which such long-term factors generate investment risks or opportunities. The Investment Manager will report annually on the implementation of this process. The Investment Manager will report annually on portfolio turnover, including the costs incurred from portfolio turnover. The Investment Manager will, as part of this reporting, provide an explanation of any divergence from turnover expectations.

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<<    Step 3

Establishing ESG committees and training needs.

The Board has collective responsibility for ensuring that the relevant roles and responsibilities have been assigned and that the right level of training and support is available. This section provides examples of how ESG committees and functions can be organised and an overview of training and support available for Trustees.

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MONITORING

The monitoring phase is crucial to assess the actual delivery of the terms and conditions on which the manager was appointed, which in turn was informed by the ESG integrated IPS. This section provides an overview of how the pension fund can review and monitor asset managers’ ongoing integration practices.

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