Chapter 9: Investment mandates, portfolio analytics and client reporting Flashcards
What does alignment mean in terms of the relationship between asset owners and asset managers?
- Timeframes and structures of portfolio manager assessment and remuneration closely reflect the performance experienced by clients and the timeframes over which they need performance to be delivered
What does accountability mean in terms of the relationship between asset owners and asset managers?
- Accountability -> Should mean that portfolio managers respond to the clearly expressed intentions of the clients and report as fully as required
What are the key steps in design of a asset manager mandate?
- Clarifying client(asset owner) needs and objectives
- Aligning investment mandates with asset owners beliefs
- Proposing ESG-aware investment mandates
- Linking time horizons to the mandate
- Defining the sustainable investment strategy
What are the key documents where investors can solicite asset managers and define their sustainable investment goals?
- Request For Proposal (RFP)
- Statement of Investment Principles
According to the PRI, what should an investment manadate require from asset managers?
- Invest in a manner consistent with the asset owners time horizon + goals
- Integrate ESG into research, analysis, decision making
- Implement effective stewardship
- Engage with policy makers
- Report on the outcomes of engagement
What was changed in 2019 in the UKs Occupational Pension Scheme Investment Regulation?
> Requires pension schemes to set out:
- Policies on how they consider financially material ESG factors within their investment approach
- The extent to which they undertake stewardship and including engagement and voting
What two fundamental questions that asset owners need to ask when developing their ESG investment philosophy?
- Are ESG factors more important for risk management or value creation?
- What ESG factors are material?
What is included in the Pension and Lifetime Saving Association Stewardship checklist?
- Be clear about how stewardship fits within investment philosophy + strategy + monitoring scheme
- Seek to ensure that fund manager and other service providers deliver effective integration of ESG factors
- Work with advisers to consider level of resources for stewardship activities
What is the difference between investment beliefs and investment mandate related to ESG integration?
- Investment beliefs and strategy -> Rationale for ESG integration, material ESG factors
- Investment mandate -> Consideration of ESG factors, including prioritization and targets
What should ESG policies of portfolio managers explain?
- Establishes the rational and methodology for ESG portfolio-level assessment
- Assess exposure to ESG risk within risk management function
- Determines ESG impact to the portfolio
- Response to ESG in the investment decision-making process
- Discloses ESG exposure to investors
What should annual reports of portfolio managers to asset owners include?
○ ESG activities across portfolio
○ Frequency of engagement
○ Highlight activities and their outcomes
- Report again KPI if possible
What characterizes Benefit insurers in terms of drivers for ESG investment, risk mindset, favored ESG approach?
ESG Driver -> Fiduciary duty
Risk mindset -> Long term, higher risk tolerance
ESG approach - > comphrehensive ESG integration
What characterizes Contribution insurers in terms of drivers for ESG investement, risk mindset, favored ESG approach?
ESG Driver -> Fiduciary duty + beneficiaries preference
Risk mindset -> If beneficiaries can switch lower risk tolerance
ESG approach - > some exclusion, comphrehensive ESG integration
What characterizes General insurers in terms of drivers for ESG investement, risk mindset, favored ESG approach?
ESG Driver -> Climate change awareness
Risk mindset -> Loss aversion
ESG approach - > Some ESG integration
What characterizes Life insurers in terms of drivers for ESG investement, risk mindset, favored ESG approach?
ESG Driver -> Recognition of long-term implication
Risk mindset -> Long term, high risk tolerance
ESG approach - > Comprehensive ESG integration
What characterizes Sovereign wealth funds in terms of drivers for ESG investement, risk mindset, favored ESG approach?
ESG Driver -> Reputational risk
Risk mindset -> Long term, high risk tolerance
ESG approach - > Some exclusion, ESG engagement
What characterizes Foundations in terms of drivers for ESG investement, risk mindset, favored ESG approach?
ESG Driver -> Reputational risk
Risk mindset -> Long term, high risk tolerance
ESG approach - > Exclusion
What characterizes Individuals in terms of drivers for ESG investment, risk mindset, favored ESG approach?
ESG Driver -> Personal ethics
Risk mindset -> Loss aversion
ESG approach - > Screening, comprehensive ESG integration
How can asset owners assess the engagement work of asset managers?
□ Who does the stewardship work -> is there a specialist stewardship team?
- How significantly are the resources assigned to stewardship
- Assessing quality of engagement and voting
- Engagement is hard to measure -> but milestones for companies progress towards better practice or performance over longer time, dialogue with stewardship team
How can assess owners monitor delivery on investment mandate?
- Short-term investment performance is of limited significance
- Crucial assessment in terms of ESG factors is whether the asset managers investment approach has been consistent with the approach promised in the mandate
Portfolio-wide ESG assessment is another way for asset owners to monitor delivery
What are portfolio-wide ESG assessment tools and how can they assist asset managers in monitoring delivery? What questions could asset managers ask?
- These tools assess ESG factors in portfolios and also ESG-linked performance attribution relative to a benchmark
○ Could include carbon intensity of companies in
the portfolio in comparison to index○ Questions could include what is the contribution
of a poorly performing company in a portfolio;
or how investment lines up with mandate- Questions also about the overall investment process, consistency with investment mandate etc
What issues could cause concern that asset managers don’t live up to investment mandate?
○ Persistent failure to adhere to Brunel investment principles
○ Change in investment style that don’t with expectations
○ Lack of understanding of the reason for any underperformance
○ Failure to follow investment restrictions
- Organizational instability
According to the PRI, what are signatories required to report on?
○ Evaluate their responsible investment progress against framework
○ Receive ongoing feedback and tools for improvement
○ Benchmark their performance
- Summarize activities for staff, clients and stakeholders
What should investment firms describe in their annual reports?
○ Their process of integrating investment mandate in investment decisions
○ Themes that they have worked on
- Case studies on ESG investing or stewardship
What are the guidelines set by PLSA on expectations for manager-reporting on ESG integration & stewardship?
or
HOW can PLSA assess whether fund manager effectively integrates ESG factors? (3)
Separate disclosures on (2):
1) Identification of ESG risk
2) Management and monitoring of ESG risks and opportunities
Identification of ESG Risk and Opportunity:
1) Examples of where and why the manager is prepared to take either stock or sector ESG risks, or where it sees opportunities
2) Quantitative or Qualitative examples of material ESG factors identified in fundamental analysis and stock valuation
3) Identification of long-term ESG secular trends and themes (as potential determinants of future growth or valuation); and the extent to which they have influenced portfolio construction decisions
SIX dimensions that leading INSTITUTIONS APPLY SUSTAINABLE INVESTING
(McKinsey)
- Investment Mandate
- Investment Beliefs & Strategy
Investment Operations:
- Tools and Processes
- Resources and Organization
- Performance Management
- Public reporting
How should ALIGNMENT be achieved with ESG investment mandates?
ALIGNMENT should be designed so that TIME FRAMES and STRUCTURES of portfolio manager REMUNERATION closely reflect PERFORMANCE EXPERIENCED by clients
How should ACCOUNTABILITY be achieved with ESG investment mandates?
ACCOUNTABILITY should mean that portfolio managers respond to the CLEARLY EXPRESSED INTENTIONS of clients and report as fully as possible
Characteristics of FOUNDATIONS for ESG investing:
EXCLUSIONS rather than ESG INTEGRATION
What are the THREE (3) main incentives for clients to integrate ESG into investments?
FIDUCIARY DUTY
REPUTATIONAL RISK
PERSONAL ETHICS
What are TWO ESG DISCLOSURES requested by ICGN (International Corporate Governance Network) MODEL MANDATE?
1) The manager’s assessment of ESG risks that are embedded in the portfolio
- What the risks are, and what the mgr has done to identify, monitor, and manage them
2) A detailed disclosure of stewardship engagement and voting activity
What are key characteristics of the BRUNEL ASSET MANAGEMENT ACCORD (BAMA)
- Long-term focus
- Softer form of agreement
- Less focused on hard- legal language
- Softer language to allow fund managers to more clearly understand client perspective
Characteristics of a portfolio which high level of stewardship
CONCENTRATED PORTFOLIOs more easily resourced from stewardship perspective
Easily to commit resources to stewardship activities
What are the main measurement instruments for ENGAGEMENT
Changes made by companies as engagement progresses, expressed as:
MILESTONES
or
OBJECTIVES
- Measures progress toward concrete change or better practice over 3 or more years typical of engagement process
What are some valid investment strategies when related to RESPONSIBLE INVESTMENT STRATEGIES?
- Acive investment
- Fundamental company-specific research
- Quant
- Event-driven
- Identify long-term track record of superior financial performance
What is the ICGN Model Mandate Initiative?
ICGN Model Mandate is model contract between asset owners and managers that provide a framework & proposes best practices for ESG-aware investment mandates:
- Monitoring and use of ESG factors
- Integration of ESG factors into investment decision-making
- Adherence to good practice around stewardship
- Voting and reporting requirements
What does PLSA (Pension and Lifetime Savings Association) disclose?
ESG Integration
&
STEWARDSHIP
-
PLSA published a disclosure guide for public equities developed by group of pension schemes, setting out expectations for manager-reporting on ESG integration and stewardship
Compared to INSTITUTIONAL investors, RETAIL investors tend to
- ## Select funds based on PERSONAL ETHICS
Drawback of outsourcing voting decision to fund managers
- Asset owner shares voted different, in line with different underlying fund managers
What are proposed disclosures to demonstrate management & monitoring of ESK risks by PLSA?
- STOCK LEVEL ESG analysis for top risk and performance detractors or contributors in reporting period
- Any MATERIAL CHANGES to portfolio companies’ ESG performance
What are the ways differerent managers will integrate ESG?
- as a THRESHOLD REQUIREMENT before investment can be considered
- as a FACTOR THAT INFORMS VALUATION or provides a QUANT basis for adjusting / tilting expsorues
- as a RISK ASSESSMENT that offers a level of CONFIDENCE in the VALUATION
- as a BASIS FOR STEWARDSHIP ENGAGEMENT
- as a COMBINATION OF TWO OR MORE OF THESE METHODS ( OFTEN THE CASE )
What are a Foundation’s primary driver?
REPUTATIONAL RISK (investment consistent with founding or charitable aims)
How can clients test asset managers for being ACTIVE OWNERs? Why do they look at outliers?
- Focus on testing OUTLIERS.. because:
- Companies with weak ESG performance will test how effective fund manager ESG integration is in practice
- Allowing fund manager to pick which case studies are discussed may lead to less insight
- Client can focus on ESG factors of most concern to them at any given time
Key signs of concern when dealing with BAMA guidelines (Brunel Asset Management Accord)
Concerns about culture and failure to adhere to expected investment process or style:
- Persistent failure to adhere to Brunel’s investment principles and spirit of the accord
- Change in investment style, or investments that do not fit into the expected style
- Lack of understanding of reasons for any underperformance, and/or reluctance to learn lessons from mistakes (including complacency after good performance)
- Failure to follow investment restrictions or manage risk appropriately (including taking too little risk)
- Organization instability or loss of key personnel
