Ch 9 Inv Mandates, PA & Client RPT

Question 1

How can investment chain agency problems be addressed?

Answer 1

As with corporate governance, these investment chain agency problems can be addressed (though not completely solved) by careful ALIGNMENT and ACCOUNTABILITY:

▶ Alignment should be designed so that the timeframes and structures of portfolio manager assessment and
remuneration closely reflect both the performance experienced by the clients they serve and the timeframes
over which they need performance to be delivered.

▶ Accountability should mean that portfolio managers respond to the clearly expressed intentions of their clients
and report as fully as required.

Question 2

What are the steps to a good design of mandates?

Answer 2

There are a number of steps to good design of mandates, and also to the oversight and monitoring process that assesses whether the mandates have in fact been delivered in practice.

These steps can be characterized as follows:

A. Clarifying client needs: defining the ESG investment strategy

B. Fully aligning investment with client ESG beliefs

C. Developing client-relevant ESG-aware investment mandates

D. Tailoring ESG investment approach to client expectations

E. Holding managers to account

Question 3

9.1.1

Explain why mandate construction is of particular relevance and importance to the effective delivery of ESG investing:

linking sustainable investing to the mandate;

defining the sustainable investment strategy

Answer 3

linking sustainable investing to the mandate;

defining the sustainable investment strategy

Question 4

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

Answer 4

1. Are ESG factors more important for risk management or value creation?

“If the mandate focuses on risk management, then the strategy might be designed to exclude companies, sectors, or geographies that investors see as particularly risky with respect to ESG factors, or to engage in dialogue with corporate managers about how
to mitigate ESG risks. If value creation is the focus, on the other hand, investors might overweight their portfolios with companies or sectors that exhibit strong performance on ESG-related factors they believe are linked to value creation.”

2. What ESG factors are material?

McKinsey notes that this is much less straightforward than the simple statement of the issue might make it seem, and that there are substantial reporting projects dedicated to identifying what is material at a sector level, let alone at an individual company level. The nature of the investment portfolio also adds a layer of complexity. The firm argues: “The selection of material factors is often influenced to some extent by exposure to asset classes, geographies, and specific companies. For example, governance factors tend to be especially important for private equity investments, since these investments are typically characterized by large ownership shares and limited regulatory oversight.”

Question 5

What are the steps to a good design of mandates, and also to the oversight and monitoring process that assesses whether the mandates have in fact been delivered in practice. These steps can be characterised as follows:

Answer 5

A. Clarifying client needs: defining the ESG investment strategy

B. Fully aligning investment with client ESG beliefs

C. Developing client-relevant ESG-aware investment mandates

D. Tailoring ESG investment approach to client expectations

E. Holding managers to account

Question 6

the assessment on ESG mandates

Answer 6

Once the mandate is agreed, the client will then wish to assure itself that the fund manager is indeed delivering in accordance with the mandate.

And for ESG mandates in particular, the assessment is likely to be across a broader range of issues. There are two forms that this work will take:

▶ monitoring meetings between the client and the fund manager; and

▶ the manager’s measurement and reporting of its ESG performance.

Question 7

9.1.2

Explain how ESG screens can be embedded within investment mandates/portfolio guidelines to:

generate investment returns

manage portfolio risk.

Question 8

two key questions that will frame how (investment philosophy and beliefs get
translated into the specifics of the mandates) is delivered in practice:

Answer 8

As McKinsey indicates, there are two key questions which will frame how this is delivered in practice:

1. Is ESG a risk management tool or a source of investment advantage?
2. Which aspects of ESG most matter from the perspective of the asset owner?

Question 9

THE SIX DIMENSIONS OF THEIR INVESTMENT PROCESS:

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

Answer 9

DIMENSION OF INVESTING vs ELEMENTS OF SUSTAINABLE INVESTING
Investment mandate
• Consideration of ESG factors, including prioritisation.
• Targets.
Investment beliefs and strategy
• Rationale for ESG integration.
• Material ESG factors.

Investment operations enablers:
✓ Tools and processes 
       • Negative screening.
        • Positive screening.
        • Pro-active engagement.
✓ Resources and organization 
      • ESG expertise and capabilities.
      • Integration with investment teams.
      • Collaborations and partnerships.
✓ Performance management 
      • Review of external managers (screening and follow-up).
       • Follow-up on internal managers (including incentives).
✓ Public reporting 
        • Accountability.
        • Transparency.