Chapter 9: Investment mandates, portfolio analytics and client reporting

Question 1

What does alignment mean in terms of the relationship between asset owners and asset managers?

Answer 1

• Timeframes and structures of portfolio manager assessment and renumeration closely reflect the performance experienced by clients and the timeframes over which they need performance to be delivered

Question 2

What does accountability mean in terms of the relationship between asset owners and asset managers?

Answer 2

• Accountability -> Should mean that portfolio managers respond to the clearly expressed intentions of the clients and report as fully as required

Question 3

What are the key steps in design of a asset manager mandate?

Answer 3

1. Clarifying client(asset owner) needs and objectives
2. Aligning investment mandates with asset owners beliefs
3. Proposing ESG-aware investment mandates
4. Linking time horizons to the mandate
5. Defining the sustainable investment strategy

Question 4

What are the key documents where investors can solicite asset managers and define their sustainable investment goals?

Answer 4

• request for proposal (RFP)

- Statement of Investment Principles

Question 5

According to the PRI, what should an investment manadate require from asset managers?

Answer 5

• 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

Question 6

What was changed in 2019 in the UKs Occupational Pension Scheme Investment Regulation?

Answer 6

> Requires pension schemes to set out:

1. policies how they consider financially material ESG factors within their investment approach
2. The extent to which they undertake stewardship and including engagement and voting

Question 7

What two fundamental questions that asset owners need to ask when developing their ESG investment philosophy?

Answer 7

1. Are ESG factors more important for risk management or value creation?
2. What ESG factors are material?

Question 8

What is included in the Pension and Lifetime Saving Association Stewardship checklist?

Answer 8

1. Be clear about how stewardship fits within investment philosophy + strategy + monitoring scheme
2. Seek to ensure that fund manager and other service providers deliver effective integration of ESG factors
3. Work with advisers to consider level of resources for stewardship activities

Question 9

What is the difference between investment beliefs and investment mandate related to ESG integration?

Answer 9

• Investment beliefs and strategy -> Rationale for ESG integration, material ESG factors
• Investment mandate -> Consideration of ESG factors, including prioritization and targets

Question 10

What should ESG policies of portfolio managers explain?

Answer 10

• 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

Question 11

What should annual reports of portfolio managers to asset owners include?

Answer 11

○ ESG activities across portfolio
○ Frequency of engagement
○ Highlight activities and their outcomes
- Report again KPI if possible

Question 12

What characterizes Benefit insurers in terms of drivers for ESG investement, risk mindset, favored ESG approach?

Answer 12

ESG Driver -> Fiduciary duty

Risk mindset -> Long term, higher risk tolerance

ESG approach - > comphrehensive ESG integration

Question 13

What characterizes Contribution insurers in terms of drivers for ESG investement, risk mindset, favored ESG approach?

Answer 13

ESG Driver -> Fiduciary duty + beneficiaries preference

Risk mindset -> If beneficiers can switch lower risk tolerance

ESG approach - > some exclusion, comphrehensive ESG integration

Question 14

What characterizes General insurers in terms of drivers for ESG investement, risk mindset, favored ESG approach?

Answer 14

ESG Driver -> Climate change awareness

Risk mindset -> Loss aversion

ESG approach - > Some ESG integration

Question 15

What characterizes Life insurers in terms of drivers for ESG investement, risk mindset, favored ESG approach?

Answer 15

ESG Driver -> Recognition of long-term implication

Risk mindset -> Long term, high risk tolerance

ESG approach - > Comprehensive ESG integration

Question 16

What characterizes Sovereign wealth fund in terms of drivers for ESG investement, risk mindset, favored ESG approach?

Answer 16

ESG Driver -> Reputational risk

Risk mindset -> Long term, high risk tolerance

ESG approach - > Some exclusion, ESG engagement

Question 17

What characterizes Foundation in terms of drivers for ESG investement, risk mindset, favored ESG approach?

Answer 17

ESG Driver -> Reputational risk

Risk mindset -> Long term, high risk tolerance

ESG approach - > Exclusion

Question 18

What characterizes Individuals in terms of drivers for ESG investement, risk mindset, favored ESG approach?

Answer 18

ESG Driver -> Personal ethics

Risk mindset -> Loss aversion

ESG approach - > Screening, comprehensive ESG integration

Question 19

How can asset owners assess the engagement work of asset managers?

Answer 19

□ Who does the stewardship work -> is there a specialist stewardship team?

• How significantly are the resources assigned to stewardship
• Assessing quality o engagement and voting
• Engagement is hard to measures -> but milestones for companies progress towards better practice or performance over longer time, dialogue with stewardship team

Question 20

How can assess owners monitor delivery on investment mandate?

Answer 20

• 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

Question 21

What are portfolio-wide ESG assessment tools and how can they assist asset managers in monitoring delivery? What questions could asset managers ask?

Answer 21

• 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

Question 22

What issues could cause concern that asset managers don’t live up to investment mandate?

Answer 22

○ 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

Question 23

According to the PRI, what are signatories required to report on?

Answer 23

○ Evaluate their responsible investment progress against framework

○ Receive ongoing feedback and tools for improvement

○ Benchmark their performance

• Summarize activities for staff, clients and stakeholders

Question 24

What should investment firms describe in their annual reports?

Answer 24

○ Their process of integrating investment mandate in investment decisions

○ Themes that they have worked on

• Case studies on ESG investing or stewardship