Investment Mandates, Analytics and Client Reporting Flashcards
Critical aspects when designing an investment mandate?
Investors should be clear about needs and expectations via a clear statement on ESG investment beliefs including:
- Goals
- Time Horizon if any
- Fees
- Statement of Investment Principles (SIP)
To ensure an effective and meaningful stewardship strategy, asset owners should:
- Be clear about how stewardship fits within their investment strategy, policy and how it helps meet their investment objectives.
- Seek to ensure that fund managers and other service providers deliver effective integration of long-term ESG factors into their investment approach.
- Work with their advisers to consider the level of resource available for stewardship activities, which assets are covered and what the appropriate structure is.
What are the two fundamental questions asset owners need to ask in developing ESG investment philosophy?
1) Are ESG factors more important for risk management or value creation?
2) Which ESG factors are material?
What ESG information should a PM include in his/her annual report? What about private or unlisted investments?
▶ ESG activities across the portfolio;
▶ frequency of engagement; and
▶ highlighted activities and their outcomes.
Portfolios with private or unlisted securities exposure may choose to report portfolio performance against key performance indicators (KPIs) over a given investment period and relative to peers.
According to the ICGN - International Corporate Governance Network - ESG investment mandates best practices include:
1) Monitoring and use of ESG factors
2) Integration of ESG factors into decision making
3) Adherence to good stewardship practice
4) Voting and reporting requirements
According to the CFA Institute, there are 6 ESG Disclosure Standards for Investment Products. The 6 themes/categories to be considered are what?
1) ESG Integration - Explicitly considering ESG related factors that are material to the risk/return of investment.
2) ESG related Exclusions - Excludes securities based on ESG related activities.
3) Best In Class - Invests in companies that outperform their peers.
4) ESG related Thematic - Invests in sectors or companies that are slated to benefits from long-term macro ESG trends.
5) Impact Objective - Seeks to generate positive and measurable social or environmental impact alongside financial return.
6) Proxy Voting, Engagement, & Stewardship- Uses rights and ownership to influence companies behaviours.
The PLSA and Investor Forum report focuses on what ESG objective? What main questions does it recommend asking?
Assessing how robust each fund manager’s approach to the area of stewardship and engagement including any framework for effective differentiation between providers.
- How does the manager sees stewardship and engagement and what its main drivers for action? How consistent is that philosophy applied across asset classes and geographies? What resources are in place, investment mindset?
- Seeking confidence in the processes by which the manager’s objectives are set and progress against them is monitored.
- Understanding how the manager allocates its engagement efforts between the different forms of engagement.
What questions should asset owners ask managers around ESG investment integration and Stewardship?
For ESG Integration:
1. What is the ESG integration process?
2. How has it been applied to individual assets, usually framed by the client identifying one or more assets that are questionable from an ESG perspective, and testing how it was that the asset(s) in question were deemed to be appropriate to be included within the portfolio.
Stewardship:
1. Who does the stewardship work?: specifically, is it outsourced, delivered by a specialist stewardship team or is it the portfolio managers (or how do these individuals successfully work together).
2. How significant are the resources assigned to stewardship?
How can fund managers respond to resource constraints around engagement?
1) Prioritization of issues/engagements
2) Outsourcing
3) Collective Action
What is it hard to properly evaluate the quality and successes of engagement?
- Long-term nuanced process
- Low visibility usually occurring in closed door meetings
- Demonstrating a correlation between investor objectives and company action is not the same thing as causation
- Shareholders do not make decisions for companies, board members do
Investment firms that are signatories of the PRI must disclose what in their annual reporting?
- Evaluate responsible investment progress against an industry standard framework.
- Receive feedback and tools for improvement.
- Benchmark performance against peers.
- Understand state of the market.
- Strengthen internal processes and build ESG capacity
- Summarize activities for staff, investors, regulators, etc.
the ICGN Model Mandate requests two areas of disclosure that are ESG-specific:
1) Managers assessment of ESG risks in portfolio including what are they, how is the manager identifying, monitoring and continuing to manage.
2) Detailed disclosure of stewardship engagement and voting activity with clearly stating that these must be two distinct disclosures
According to the Brunel Asset Mgmt Accord, what gives greater cause to concern than underperformance?
▶ Persistent failure to adhere to Brunel’s investment principles and the spirit of the accord.
▶ A change in investment style, or investments that do not fit into the expected style.
▶ Lack of understanding of reasons for any underperformance, and/or a reluctance to learn lessons from mistakes. Conversely, complacency after good performance should be avoided.
▶ Failure to follow the investment restrictions or manage risk.
What are Mckinsey’s proposed dimensions of investing and what are their considerations??
1) Investment Mandate - considerations of ESG factors and including prioritization and targets
2) Investment Beliefs and Strategy - Rationale for ESG Integration and Material ESG Factors
3)Investment Operations including: Tools and Processes such as Positive Screening
Resources and Organization such as ESG Expertise
Performance Mgmt such as Manager Review
Public Reporting such as Accountability/Transparency
What is the clearest risk from an asset owner leaving voting decision-making in the hands of its fund managers?
Reduces accountability for the Fund Managers decision
