chapter 9 Flashcards
INVESTMENT MANDATES, PORTFOLIO ANALYTICS, AND CLIENT REPORTING
Accountability to Clients and
Alignment with Them
Agency Problems in the Investment Chain: Discuss the “double agency” problem identified by John Bogle, where corporate agents face money managers who represent their clients. The need for careful alignment and accountability to address these issues.
Designing Effective Mandates: Explore the importance of designing mandates that align investment processes with clients’ long-term goals, including ESG considerations.
Role of RFPs: Introduce the role of Request for Proposals (RFPs) in evaluating and selecting fund managers who align with client ESG expectations
Defining the ESG Investment Strategy
Articulating Client Needs: The first step in mandate design is to clearly articulate client needs, focusing on their ESG beliefs and investment goals.
Statement of ESG Investment Beliefs: Clients should define their investment philosophy, including
their approach to ESG factors, in a statement of investment principles.
Examples of Investment Beliefs: Discuss examples of investment beliefs from major asset owners like the CPP Investment Board and Australian Super, emphasizing how these beliefs shape ESG integration.
Operationalizing Client ESG Beliefs
Translating Beliefs into Mandates: Once client beliefs are defined, the next challenge is to operationalize them in the investment approach of fund managers.
Framing Expectations: Frame basic expectations, including ESG screening approaches, alignment across asset classes, and integration of ESG issues into decision- making.
Examples of ESG Mandates: Provide examples, such as a pension fund concerned about climate change investing in renewable energy or excluding fossil fuel investments.
Creating Client-Relevant Mandates
The RFP Process: Discuss the RFP process as a critical step in developing ESG- aware mandates, including sending comprehensive questionnaires to potential managers.
Shortlisting and Interviews: Explain the process of shortlisting managers and conducting interviews to ensure alignment with client ESG expectations.
Tailoring Investment Strategies: Emphasize the importance of tailoring investment strategies to different client types, such as institutional, retail, or private clients, with varying ESG priorities.
Tailoring ESG Strategies to Client
Expectations
Different Client Expectations: Discuss how different types of clients have varying expectations regarding ESG issues, influencing the choice of investment strategies.
Aligning Fund Manager and Client
Expectations: The importance of ensuring that the fund manager’s approach is fully aligned with the client’s ESG expectations, both within and outside the legal mandate.
Case Examples: Provide examples of how specific ESG concerns, such as human rights or environmental sustainability, are reflected in tailored mandates.
Monitoring Delivery and Accountability
Ongoing Monitoring: Explain the importance of ongoing monitoring to ensure that fund managers deliver on their ESG mandates, including regular review meetings and performance assessments.
Cultural and Process Consistency: Emphasize the need to assess whether the fund manager’s culture and processes remain consistent with the client’s expectations over time.
Case Study: Provide a case study with sample questions that a client might ask during monitoring discussions to assess the fund manager’s adherence to the ESG mandate.
Measurement and Reporting of ESG
Performance
ESG Reporting Standards: Discuss the varying quality of ESG reporting by investment managers, from general discussions to concrete actions taken.
PRI Reporting: Introduce the PRI reporting process and how it allows fund managers to assess and report their ESG performance against an industry-standard framework.
Portfolio Analysis Tools: Explore the use of portfolio analysis tools that assess ESG characteristics relative to benchmarks, providing insights into ESG integration.
Effective ESG Reporting to Clients
Types of Reports: Discuss the types of reports typically produced by investment firms, including annual and quarterly reports, and the themes they address.
Engagement and Voting Disclosures: Explain the importance of disclosing engagement and voting activities, ensuring transparency in stewardship efforts.
Challenges in ESG Attribution: Address the challenges of attributing performance to ESG factors, particularly in integrated investment processes where ESG and financial metrics are intertwined.
