Content Finder - Step 5 - 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 priorities stated in the IPS.
There are many ways in which the pension fund can review and monitor investment performance and managers’ ongoing integration practices. But similar to the selection process, it will typically involve some periodic quantitative assessment (questionnaires or reports) combined with discussions at the in-person review meetings as per the examples below.
- Organise periodic monitoring meetings with investment managers. ESG integration should be discussed alongside investment performance. The asset owner should ensure that they are meeting with the key decision-makers, such as investment analysts, the portfolio manager and the ESG team. The meetings should discuss the portfolio’s investment performance, the level of investment risk in the portfolio, what changes have been made to the investment process and integration practices, and whether the investment manager is actively and successfully integrating ESG factors into investment decisions. See sample questions below.
- Ask fund managers to complete questionnaires or regularly report. The amount, frequency and type of information that asset owners request from investment managers depends on the mandate, the agreed ESG policies and practices and the asset owner’s capacity to review the information. The investment managers’ investment process and integration techniques should be included in their reporting and their reports should be regularly updated with examples of ESG integration in the current reporting year.
- Consider use methods such as peer analysis, internal scoring systems and portfolio analytic tools. A pension fund can execute, or ask their investment consultant to execute, a peer analysis of ESG integration performance based on publicly available information such as responsible investment reports or the PRI’s Transparency Reports.
This checklist has been adopted from PRI publication; A practical guide to ESG integration in equity investing (2016).
Questions on ESG integration should be included in all avenues for performance monitoring of fund managers. The areas to be monitored in line with the IPS includes the portfolio’s investment performance, the level of investment risk in the portfolio, what changes have been made to the investment process and integration practices, and whether the investment manager is actively and successfully integrating ESG factors into investment decisions.
Below is a list of guiding questions that can be considered in surveys, reporting requirements, and as a basis for discussions and ongoing dialogue with the fund managers in review meetings. It can also be noted that in such meetings, the asset owner should ensure that they are meeting with the key decision-makers, such as investment analysts, the portfolio manager and the ESG team.
Example questions: Investment analysis and selection
- Have there been any changes to your ESG integration process over the reporting period (e.g. additional resources, information sources)? If so, why?
- Which integration practices/tools have worked and have not worked over the reporting period, and why?
- What are some specific examples of how ESG factors have impacted investment decisions?
- What are some specific examples of major ESG risks that you identified in the holdings in the portfolio over the reporting period, and what have you done to mitigate them?
- Have concerns over tracking error prevented you from divesting a holding with high ESG risks? If so, what is a specific example?
- What are some specific examples of ESG factors contributing to buy and sell decisions, e.g. are there any examples of instances where you chose one company over the other due to ESG considerations?
- What are some specific examples of valuations being adjusted due to an ESG factor? How did this impact the investment decision?
- Regarding the recent revelations about company X in the portfolio, why did you buy/hold/sell the stock or increase/decrease your holdings?
Example questions: Active ownership
- How was ESG information that had been gathered through active ownership activities used to identify investment risks and opportunities? What impact has this had on investment decisions?
- How have you measured success of the engagement? Was this quantifiable? If not, what were the qualitative results?
- How are portfolio managers involved in active ownership activities? Any collaborative engagements? What were the outcomes?
- What are some specific examples of engagement activities or voting outcomes resulting in a stock being sold or bought?
Example questions: Reporting
Assessment of the fund managers reporting can also be helpful in the monitoring process. Questions that Trustees may want to ask regarding reporting practices include:
- Please provide reports reflecting ESG integration activities, performance and impact.
- What is the level of detail and frequency?
- Please demonstrate how you communicate ESG integration performance to your stakeholders (e.g. to executives, the board, investors, staff, consultants, service providers and intermediaries).
- Please explain how your ESG process relates to the PRI Reporting Framework.
- What performance indicators do you use to measure and report on your ESG impact?
- Are you willing to share your PRI Transparency and Assessment Reports with us?
- Please provide an example of how you would like to report to us about the performance of this product.
- What performance indicators will you use to measure and report on ESG impact or integration for this product?
A two-way dialogue: Questions a Trustee can expect from a pro-active ESG fund manager.
Investment managers should also play their part in discussions by proactively asking about their client’s (the pension fund’s) investment strategy and policy, their integration practice expectations and the integration practices of their other external managers. Example of questions that Trustees can expect from their fund managers:
- What, in depth, is the rationale behind your investment strategy and policy?
- What are the most material ESG issues and themes that impact your whole portfolio? What drives materiality? What are your views and expectation on them?
- To what extent do ESG factors play a part in the manager selection and monitoring process?
- What are your integration practice expectations of your investment managers?
- What information do you require on our investment process, integration practices and investment decision-making?
- What information, including regular reports, do you require about the portfolio holdings?
- Do you expect your investment managers to integrate ESG factors into their valuation models?
- Do you monitor the ESG risk exposure of your overall portfolio?
- How can we best establish the mechanism for doing so at the individual fund level?