Ch. 9 Mandates Analytics and Reporting

Question 1

“double-agency” one – namely,

Answer 1

a society
in which corporate agents (as a practical matter, corporate CEOs) “who are duty-bound to represent their
shareholders face money manager/agents who are themselves duty-bound to represent their mutual fund
shareholders and their other clients, often pension funds.”1

Question 2

client mandates should deliver on …

Answer 2

A. Clarifying client needs and objectives (investment goals and beliefs)
B. Aligning investment with clients’ beliefs

Question 3

C. Proposing ESG-aware investment mandates

Answer 3

Best practices for ESG-aware investment mandates around:

▶ the monitoring and use of ESG factors;
▶ the integration of ESG factors into investment decision-making;
▶ adherence to good practice around stewardship; and
▶ voting and reporting requirements
▶ Implement the asset owner’s investment beliefs and relevant investment policies.
▶ Integrate ESG issues into their:
▶ Invest in a manner consistent with the asset owner’s time horizons, understanding the key risks that must be
managed to achieve the asset owner’s portfolio goals.
▶ Implement effective stewardship processes, including:

Engage constructively and proactively with policymakers

▶ Report on the actions taken and outcomes achieved

Question 4

D. Linking sustainable investing to the mandate

Answer 4

Linking sustainable investing to the mandate
On occasions, the specific ESG (or other) requirements of a client are not included in the contractual mandate
itself, but in a side letter, which also has contractual status

Note: ASSET OWNERS HAVE A LONG TERM HORIZON THAN THAT OF THE FUND MANAGER IN THE INVESTMENT PROCESS

Question 5

Brunel

Asset Management Accord sets (linking to mandate)

Answer 5

out a pension manager’s approach to long-term investment
and ESG factors, but in a form of words that it believes is less-suited to the hard legal language of a specific
contract, but more to a softer form of agreement whereby the fund managers are enabled more clearly to
understand the client’s perspective and so, align to it.

Question 6

E. Defining the sustainable investment strategy

Answer 6

PLSA Stewardship checklist

It has become common now for asset owners to set out their investment beliefs – namely, a philosophy of what the institution believes will
drive returns and deliver value over the relevant time-horizon. Most asset owners these days incorporate a
perspective on ESG factors.

Question 7

The investment philosophy is often shaped by

Answer 7

the overall purpose of the organisation,
set by its founding documents. For many asset owners now, it is vital that ESG is integrated within that
purpose.

Question 8

McKinsey suggests that there are two fundamental questions that
asset owners need to ask in developing their ESG investment philosophy:

Answer 8

1. Are ESG factors more important for risk management or value creation? (Risk mgmt = more exclusion based, Value creation is more inclusion)
2. What ESG factors are material? (dependent on geo, aa, etc..)

Question 9

LEADING INSTITUTIONS APPLY SUSTAINABLE INVESTING PRACTICES ACROSS SIX DIMENSIONS OF THEIR
INVESTMENT PROCESS AND OPERATIONS

Answer 9

Table 9.1

Mandate
Beliefs/Strategy

Enablers:
Tools
Resources
Performance MGMT
Public Reports

Question 10

inherent challenges, some of which may be due

to:

Answer 10

▶ the lack of ESG data within their scope; or

▶ a relative scarcity of methodologies and best practices to apply ESG integration within an asset class

Question 11

It is in the interests of a multi-strategy investment firm that manages both fundamental and
quantitative ESG strategies to highlight the fact that

Answer 11

active ownership activities (like engagement)
are more relevant to more concentrated, fundamental strategies, rather than more diverse
quantitative portfolios.

Question 12

Monitoring action for embedding ESG investment

Answer 12

▶ addresses ESG issues at portfolio reviews;
▶ establishes the rationale and methodology for ESG portfolio-level assessment;
▶ assesses exposure to ESG risk within the risk management function;
▶ determines ESG impacts to the portfolio;
▶ responds in the investment decision-making process to ESG implications; and
▶ discloses ESG exposure to the fund’s investors

▶ ESG activities across the portfolio;
▶ frequency of engagement; and
▶ highlighted activities and their outcomes

Question 13

Investment integration is usually focused on decision making and typically operates at two levels

Answer 13

1. An analysis of the formal process and in particular, how ESG is integrated.
2. A discussion of the process as it has been applied to individual assets, usually framed by the client identifying
   an asset that is questionable from an ESG perspective and testing how it was that the asset in question was
   deemed to be appropriate to fit within the portfolio.

Question 14

expectations around effective stewardship delivery. Clients will probe and test
the effectiveness of fund manager voting and engagement approaches – both policy and delivery

Answer 14

▶ Who does the stewardship work: specifically, is it delivered by a specialist stewardship team or is it the portfolio
managers (or how do these individuals successfully work together)?

▶ The closely connected issue of: how significant are the resources assigned to stewardship?

Question 15

major challenge of engagement?

Answer 15

firm resourcing

• less of issue in concentrated funds (PM is involved)
• two solutions (outsourcing and collective action)

Question 16

Assessing engagement is harder. Because engagement is nuanced and long-term, it is hard to have a clear
view of its effectivenes

Answer 16

it occurs in private meetings, so the visibility of even the activity itself is low, but the
difficulty goes further than this: effectiveness is largely invisible even for the engager. (an investor may overstate there case, correlation is not causation

Question 17

ESG and different client types

Answer 17

9.2

horizion, driver of integration and risk mindset drives type of proffered ESG integration

Question 18

Monitoring delivery can be assessed with the

Answer 18

The Brunel Asset Management Accord

The document
emphasises that short-term underperformance is not in itself likely to give rise to undue concern for the client:

“Investment performance, particularly in the short term, will be of limited significance in
evaluating the Manager.”

Question 19

ESG engagement questions in case study

Answer 19

Ch 9 pg 443

Question 20

The attribution of returns to ESG is challenging…

Answer 20

b/c range of investments, difficult to measure value add of engagement( timescale), the more integrated the harder it becomes to disaggregate the ESG drivers

Question 21

two considerations from PLSA on ESG integration

Answer 21

1. identification of ESG risk; and
2. the management and monitoring of ESG risks and opportunities, with suggested possible disclosures in respect
   of each. (example where manager take ESG risk for opportunity - esg measurement examples - identification of ESG trends (growth and valuation), top/bottom contributors for ESG, ESG view different from market)

Question 22

ICGN Model Mandate requests two areas of disclosure that are ESG-specific:

Answer 22

1. The manager’s assessment of ESG risks must be embedded in the portfolio, including both what these risks
   are, and what the manager has done to identify, monitor and manage them. This can readily be compared
   against the external tools used to assess ESG risk in the portfolio, or the ESG element of the performance
   factoral analysis. This should prove a core element of the portfolio manager demonstrating their genuine ESG
   investment credentials.
2. A detailed disclosure of stewardship engagement and voting activity must be prepared. The mandate is clear
   that these need to be two separate disclosures, i.e. disclosure merely of voting activity is not sufficient to satisfy
   the requirement for engagement disclosure.