Tool section FOUR A

Selecting Service Providers

4. 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.


Asset Consultant Selection

Many Boards of Trustees work extensively with investment consultants on many 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 areas.

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

Checklist 1 - Asset consultant selections

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:

  1. Investment strategy – including defining of fiduciary obligations; formulation of investment principles, and strategy and investment policy.
  2. 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

a) 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.


Asset Manager Selection

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

Checklist 2 - Asset Manager selectioN

[Confirm with PRI and insert PRI logo] 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.


  • 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


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. See further FAQ section on Link between ESG and investment performance.

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

[[CECILIA – Advise }}<

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

Case study

Cecilia / Stephen to clarify  here.

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