Asset Owner Manager Selection Guide:: Enhancing Relationships and Investment Outcomes With Esg Insight

ASSET OWNER MANAGER
SELECTION GUIDE:
ENHANCING RELATIONSHIPS AND
INVESTMENT OUTCOMES WITH ESG INSIGHT
An investor initiative in partnership with UNEP Finance Initiative and UN Global Compact
THE SIX PRINCIPLES
PREAMBLE TO THE PRINCIPLES

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we
believe that environmental, social, and governance (ESG) issues can affect the performance of investment portfolios (to
varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these
Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary
responsibilities, we commit to the following:
1
We will incorporate ESG issues
into investment analysis and
decision-making processes.
2
We will be active owners and
incorporate ESG issues into our
ownership policies and practices.
3
We will seek appropriate
disclosure on ESG issues by
the entities in which we invest.
4
We will promote acceptance and
implementation of the Principles
within the investment industry.
5
We will work together to
enhance our effectiveness in
implementing the Principles.
6
We will each report on our
activities and progress towards
implementing the Principles.
PRI's MISSION
We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such
a system will reward long-term, responsible investment and benefit the environment and society as a whole.
The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and
collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing
obstacles to a sustainable financial system that lie within market practices, structures and regulation.
PRI DISCLAIMER
The information contained in this report is meant for the purposes of information only and is not intended to be investment, legal, tax or other advice, nor is it intended
to be relied upon in making an investment or other decision. This report is provided with the understanding that the authors and publishers are not providing advice on
legal, economic, investment or other professional issues and services. PRI Association is not responsible for the content of websites and information resources that may
be referenced in the report. The access provided to these sites or the provision of such information resources does not constitute an endorsement by PRI Association of
the information contained therein. Unless expressly stated otherwise, the opinions, recommendations, findings, interpretations and conclusions expressed in this report
are those of the various contributors to the report and do not necessarily represent the views of PRI Association or the signatories to the Principles for Responsible
Investment. The inclusion of company examples does not in any way constitute an endorsement of these organisations by PRI Association or the signatories to the
Principles for Responsible Investment. While we have endeavoured to ensure that the information contained in this report has been obtained from reliable and up-to-date
sources, the changing nature of statistics, laws, rules and regulations may result in delays, omissions or inaccuracies in information contained in this report. PRI Association
is not responsible for any errors or omissions, or for any decision made or action taken based on information contained in this report or for any loss or damage arising from
or caused by such decision or action. All information in this report is provided “as-is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained
from the use of this information, and without warranty of any kind, expressed or implied.
2
ASSET OWNER MANAGER SELECTION GUIDE | 2018
ACKNOWLEDGEMENTS
This guide incorporates the expertise of individual PRI

signatories, without representing the views of specific asset
owners. The PRI would like to thank the PRI Asset Owner
Advisory Committee for its strategic advice, as well as
contributors in the PRI Manager Selection Working Group,
and the following individuals:
■■ Christopher Ailman, Chief Investment Officer,

CalSTRS
■■ Vicki Bakhshi, Head of Governance & Sustainable
Investment, BMO Asset Management
■■ Tim Barron, Chief Investment Officer, Segal
Rogerscasey
■■ Lucas van Berkesteijn, Executive Director of
Sustainability Investing Solutions, RobecoSAM
■■ Urs Bitterling, Head of ESG Office, Allianz Group
■■ Joshua Cherry-Seto, Chief Financial Officer, Blue Wolf
Capital Partners
■■ Leanne Clements, independent, formerly Responsible
Investment Manager, Pension Protection Fund
■■ Sarah Cleveland, Founder, Sarah Cleveland
Consulting
■■ David DeVos, Vice President, Global Director of
Sustainability, PGIM Real Estate
■■ Honor Fell, Manager Research, Redington
■■ William Gilson, independent, formerly Managing
Director, Babson Capital Management
■■ Anne Gloor, Founder, Peace Nexus Foundation
■■ Andrew Gray, Manager of Investments Governance,
AustralianSuper
■■ Andreas Hallermeier, Sustainability Manager, Bayerische
Versorgungskammer
■■ Magdalena Lönnroth, Portfolio Manager & Head
of Responsible Investment, The Church Pension
Fund
■■ Hiro Mizuno, Executive Managing Director & Chief
Investment Officer, Government Pension Investment
Fund
■■ Faith Ward, Chief Risk Officer, Environment Agency
Pension Fund
■■ George Wong, ESG Integration Manager, New York
State Common Retirement Fund
3
CONTENTS
FOREWORDS 5
BACKGROUND 7
EXECUTIVE SUMMARY 8
GAINING A HIGH-LEVEL VIEW OF PROSPECTIVE MANAGEMENT FIRMS 10

CULTURE 10
INVESTMENT APPROACH AND OBJECTIVES 10
INVESTMENT POLICY: CODIFYING A STRATEGY 11
INVESTMENT TIME HORIZON 12
ASSET CLASSES 12
GOVERNANCE AND ORGANISATIONAL ARCHITECTURE 13
PORTFOLIO CONSTRUCTION AND INVESTMENT DECISION MAKING 16

INVESTMENT DECISION MAKING 17
RISK-RETURN FRAMEWORK 18
PORTFOLIO CONSTRUCTION 19
THEMATIC AND SCREENING APPROACHES 19
INTEGRATION 20
IMPACT INVESTMENT 22
ASSESSING ACTIVE OWNERSHIP THROUGH ENGAGEMENT AND VOTING 23

ENGAGEMENT 23
VOTING 25
REPORTING 29
PRACTICAL TIPS FOR MAKING SELECTION DECISIONS 30
4
FOREWORDS
Selecting investment managers is more an art than a

science. Try as we might to apply statistics and data
comparisons, selecting one investment manager over
another is ultimately a judgement call and hence more an
art. This guide is intended to be just that: a guide, not a
formula. It has been written for asset owners around the
world, with every asset class in mind.
Investment performance is the goal, yet it does not provide

a meaningful indication as to how a manager will perform
in the future. We hear that past performance is not an
indicator of future performance all the time. So, what is?
I propose the four Ps: People, philosophy, process and price.

If you want an investment manager to think long term and
incorporate environment, social and governance (ESG)
factors, you need to ask them to demonstrate how they are
doing this. This guide offers several starting questions, to be
used in dialogue rather than as a rigid checklist. Talk is cheap
and words are easy; it is an investment manager’s actions
and portfolio decisions that truly demonstrate whether they Christopher Ailman
just know the letters E, S and G versus actually living ESG. CIO, CalSTRS and Chair, the PRI Manager Selection
Working Group
The four Ps combined epitomise the investment manager’s
overall culture. Understanding organisational DNA takes
time and communication. This guide presents the opening
questions, but it is down to individual asset owners to ask
the deeper follow-up questions. This is not always easy;
most of us in the investment business are more comfortable
dealing with numbers than people and psychology – but ESG
is a mindset.
Most asset owners have very long-term liabilities and

must incorporate ESG risks and opportunities into
their investment process. They must therefore employ
investment managers that also have a long-term investment
outlook. The challenge is identifying those managers.
5
Asset owners, sitting atop the investment chain with
long-term investment horizons, are ideally placed to
drive responsible investment throughout the investment
cycle. One of the most important ways to do this is by
ensuring that the mandates they give to fund managers
include requirements for analysing and reporting on ESG
considerations.
The PRI is keenly aware of the role that asset owners can
play in moving ESG incorporation into mainstream investing.
But, as we have seen, too often asset owners fail to
communicate these requirements to their managers, leading
to a lack of clarity around ESG implementation.
To this end, the PRI has recently launched a series of guides,

including the newly-released Asset owner strategy guide:
How to craft an investment strategy, Investment policy:
process & practice and A practical guide to active ownership
in listed equity.
Our latest guide, How to enhance manager relationships Kris Douma

and investment outcomes with ESG insight, shows that Director, Investment Practices and Engagements, the
asset owners can positively influence the actions of other PRI
stakeholders across the investment chain, thereby helping
to shape a more sustainable financial system.
Importantly, it does not provide a one-size-fits-all approach;

rather, it focuses on the interactions between asset
owners and investment managers, and examines how ESG
considerations can be implemented during the manager
selection process.
Ultimately, if asset owners want the financial markets to

take responsible investing seriously, they must clearly
convey their ESG commitments when they select, appoint,
monitor and reward investment managers.
6
BACKGROUND
Efforts by the PRI to address ESG-related issues in the manager selection process. It is not intended to serve as
investment manager selection, appointment and monitoring a prescriptive manager selection process or due diligence
process date back to 2013, with the launch of Aligning guide and hence it does not follow a standardised selection
expectations – guidance for asset owners on incorporating process exhaustively. Instead, it focuses on areas where ESG
ESG factors into manager selection, appointment and issues are most prominent.
monitoring.
While being detailed, the guide is unable to acknowledge
This guide – Enhancing relationships and investment potential eventualities across all assets and investment
outcomes with ESG insight – provides more detail on what situations. The sub-sections of each chapter offer a list of
ESG-related issues asset owners need to think about food-for-thought questions for asset owners to consider
when looking to select an investment manager. It provides and ask prospective managers at the firm and/or product
overarching guidance on incorporating ESG considerations level. The PRI’s definitions apply throughout, and can be
across all asset classes, products and managers during the viewed here.
Figure 1: The PRI’s work on asset owner processes: from strategy to monitoring
1 2 3 4 5 6
DESIGN
SELECT AN APPOINT MONITOR
REVISE YOUR YOUR ASSET
INVESTMENT EXTERNAL EXTERNAL EXTERNAL
INVESTMENT ALLOCATION AND
STRATEGY GUIDE INVESTMENT INVESTMENT INVESTMENT
POLICY INVESTMENT
MANAGER MANAGER(S) MANAGER(S)
MANDATE(S)
Step one is covered Step two is covered Step three helps Step four, covered The PRI will release further asset owner
in the PRI’s newly- in Investment asset owners in this guide, focuses guidance later in Q2 2018, on appointing
released asset owner policy - process & understand their on how asset (step five) and monitoring (step six)
investment strategy practice: a guide for mandates by reverse owners can enhance investment managers.
guide, entitled Asset asset owners, which engineering relevant their manager
owner strategy focuses on how to aspects of desirable relationships
guide: How to craft codify strategies into manager selection and investment
an investment effective investment outcomes. The outcomes with ESG
strategy. Particularly policies. PRI will work on insight.
useful for resource- the topic of asset
constrained asset allocation and
owners, it provides a the Sustainable
step-by-step process Development
for developing an Goals in 2018.
investment strategy. Further details on
mandate design
can be found from
the International
Corporate
Governance
Network – Mandate
Design Initiative.
7
EXECUTIVE SUMMARY
INVESTMENT APPROACH Investment managers must ensure that investment

processes incorporate ESG analysis, and that such insight
Culture is one of, if not the, most important element to is presented to investment decision makers (and that
consider when selecting an external manager. If there is those decision makers are able and empowered to act
no cultural fit and understanding of ESG factors between accordingly). Asset owners should verify that final decision
an asset owner and a potential manager, there is little makers use available ESG material and organisational
fundament to establish a long-term investment relationship. insight in their investment decisions. They should also ask
prospective managers to support any claims with evidence
Questions on investment approach and objectives should and real examples.
shed light on how a manager produces value through
ESG insight. Understanding the business and investment Investments always have real economy impacts that can be
philosophy of a prospective manager enables asset owners positive and/or negative (for example, they may increase or
to ascertain whether such an approach is in line with their decrease pollution levels, generate corporate and income
own objectives. taxes, support employment or create discrimination) and
are intertwined with long-term prosperity. Asset owners
An investment policy should reflect an asset owner’s that limit analysis to purely risk and return are missing
strategy and views on best practice in managing a crucial element in their portfolio’s contribution to end
investments, including incorporating ESG factors. A written beneficiaries and society at large. Clarity on real economy
investment policy should define what ESG means to an impact expectations during the selection phase will help
investment manager in practical terms. While strong to align interests for a productive long-term commercial
cultures may override weak policies, it is vital that policies relationship. Asset owners must also be clear about what
are recorded and endorsed by the board and CEO. An risk means to them at each level of the investment process,
assessment of the policy should indicate whether it is and how it can vary across the portfolio.
compatible with an asset owner’s ESG-related definitions
and expectations. In portfolio construction, it is not just a question of what
goes in, but how much goes in. Parameters like tracking
An investment manager may not have the same level of error are important as they directly influence choice of
ESG competency across all asset classes. Manager firm- investments, but may not be critical.
level practices may also not be fully suitable for all asset
classes due to style, culture or resources. When selecting an Thematic and screening approaches select investments in
investment manager, asset owners should first look at the securities that fit into certain criteria and play increasingly
firm’s overall ESG alignment, then its capability in a specific important roles in asset allocation considerations. Asset
asset class, and then choose a suitable investment product. owners should pay close attention to the methodology,
rules and accuracy of chosen screens during the selection
A firm’s approach to investment governance will depend on process.
its culture, style and size. Certain investment approaches
may also require a specific set-up of resources that needs to One way to ascertain the effectiveness of an investment
be observed. An evaluation of a manager’s resources should manager’s integration approach is to consider the price of
also extend to the quality and suitability of its external an investment firstly with and then without ESG factors
vendors as a regular part of operational due diligence. accounted for. Activities portrayed as “integration” often
merely amount to simple screening, whereas integration
done well is a powerful method of fundamental analysis.
PORTFOLIO CONSTRUCTION AND
Asset owners that wish to include impact investments
INVESTMENT DECISION MAKING in their portfolios should seek to understand how their
Services that provide product-level information on managers define impact and how they seek to measure such
portfolio holdings exist, and as part of their reporting to impact. One problem facing the industry is the branding of
the PRI investment managers answer questions on ESG certain funds as impact investments without a clear link to
incorporation processes at the firm level. However, true end results. It is therefore vital that asset owners help to
understanding can only be gained from well-executed maintain the integrity of the market by choosing products
dialogue. and funds that genuinely deliver positive impacts.
8
ENGAGEMENT AND VOTING Some investment managers lend equity and bonds to boost
their portfolio returns. If those securities are not recalled
It is often the case that a single asset owner or manager in time to exercise voting, the borrower is entitled to vote
represents a very small part of a company’s overall capital. A them. Negative publicity might cause controversial votes
group of investors of the same standing will therefore tend in stocks with concentrated ownership. Similarly, selecting
to have a stronger chance of engaging successfully than one a product that provides synthetic exposure to a stock or
single voice. Collaborating with peers also facilitates the an index through a derivative might not come with voting
dissemination of best practices across the industry. rights.
The process an investment manager uses to engage, as

well as its perceptions of engagement, should always be
assessed. It is also important to understand the semantics REPORTING
around engagement and voting practices, as some managers The selection process should consider the ongoing reporting
may promote pure voting activities as engagement. from the manager to the asset owner and satisfy the latter’s
Engagement activities can directly impact financial internal investment-related information requirements, as
performance. well as be able to serve their own reporting to stakeholders.
Asset owners should ask for examples of how a manager’s

engagement approach is structured. Identifying the
individuals responsible and understanding the related
processes is a good first step, with ascertaining how those
individuals interact with investment decision makers a good
second step.
It is also important to find out whether engagements are

initiated across all of the manager’s assets. If the manager
outsources engagement to a third party, asset owners
should assess the terms of the arrangement and the
sustainability of the relationship. Asset owners should
have the same fundamental perspective on engagement
regardless of whether an active or passive strategy is in
question.
When engaging through service providers, asset owners

should ideally define topics to raise, as well as companies
to target and objectives to achieve (this may be done via
a policy or as a more hands-on, one-off exercise). Asset
owners should participate in the engagements they
care most about and establish during the selection and
appointment process how such arrangements will work.
During the selection process, asset owners should

understand the voting process and assess the quality and
suitability of the execution of these processes, as well as any
professional parties involved. From a selection perspective,
asset owners need to make sure the mechanistic aspects
of the voting chain function properly, that quality service
providers are obtained and that votes reflect their target(s).
9
GAINING A HIGH-LEVEL VIEW OF
PROSPECTIVE MANAGEMENT FIRMS
There are important distinctions between a manager’s firm-
wide investment process or approach and how a product is Questions to explore firm culture
governed. An asset owner may identify desirable firm-level
ESG practices that are aligned with its investment strategy ■■ What is your overall investment philosophy,
and policy, but if it selects a product where ESG factors are including how you believe incorporating ESG factors
ignored or not aligned with broader aims and objectives, adds value? How is this embedded throughout the
the ESG and investment impact will be limited, nulled or organisation?
negative. On the other hand, if selecting what appears to ■■ What is your investment style and philosophy and
be a well suited ESG product or ESG integrated mainstream how are these incorporated into your strategy?
fund from a manager that lacks a high-level strategic policy
and cultural commitment to incorporating such factors, an
■■ Please describe how your organisation incentivises
asset owner would need to question if that product has the staff. Is ESG insight considered?
long-term institutional support to survive. Asset owners also ■■ Are you a long-term manager that is able to
need to be wary of potential future style drift of a chosen perform within the chosen investment time frame?
product.
This chapter focuses on an investment manager’s culture,

investment approach and objectives, investment policy, time
INVESTMENT APPROACH AND
horizon, asset classes and governance. Looking at these OBJECTIVES
areas gives asset owners a high-level understanding of
Questions on investment approach and objectives should
prospective management firms as well as product insight.
shed light on how a manager produces value through
Asset owners should also ask for examples of successful
ESG insight. Understanding the business and investment
and non-successful ESG integration to gain a fuller
philosophy of a prospective manager enables asset owners
understanding of what success looks like (or should look
to ascertain whether such an approach is in line with their
like).
own objectives.
Investment objectives usually differ across managers,

CULTURE strategies, funds and products. Asset owners will encounter
high-level statements and more specific objectives closer
Culture is one of, if not the, most important element
to the product level during the selection process. The most
to consider when selecting an external manager. In this
straightforward approach would entail ESG incorporation
context, culture represents a set of habits, codes and
being part of a management firm’s overall investment
expectations that govern how an organisation invests,
objectives and reflected across all activities and products.
regardless of its size and geographical location. If there is
This might include a mission statement, an outline of
no cultural fit and understanding of ESG factors between
thematic investment strategies and active ownership
an asset owner and a potential manager, there is little
objectives, and an ESG benchmark for a manager’s
fundament to establish a long-term investment relationship.
operations.
However, culture is an ambiguous concept. Questions about
The selection process is more complex when ESG factors
manager ownership and management alignment with the
are not explicitly expressed in investment objectives.
incentive structures, beliefs and values of decision makers –
It is possible, although rare, that a management firm
beyond their technical competencies – are key components
that does not express ESG commitments in high-level
to assess. For example, it is important to find out whether
objective or approach statements still uses ESG insight in
a firm’s culture is distribution led, with incentives related
investment decisions. To avoid greenwashing, however,
to asset accumulation, or investment led, with incentives
asset owners should ascertain how high-level approach and
reflecting investment outcomes. Assessments should
objectives statements that include ESG considerations are
reveal how “cultural outcomes in firms [need to] embody
operationalised across the firm and employees.
respect for public interest objectives”, as cited by the FCA’s
CEO, Andrew Bailey, at the HKMA Annual Conference for
If an asset owner’s investment strategy does not align with
Independent Non-Executive Directors in March 2017. We
a manager’s firm-level objectives, the asset owner must
recommend that all selection processes culminate in on-
reconsider whether to grant a mandate. As previously
site meetings, with asset owners meeting the prospective
discussed, assessing investment approach and cultural fit is
manager’s team to gauge cultural fit. Regardless of whether
crucial and can be reinforced by reviewing policies (more on
a consultant is used in the selection process or an asset
policy below). For example, a fund that measures its carbon
owner works independently, culture must be addressed in all
footprint without aiming to mitigate portfolio risk in a +2
Requests for Proposals (RfPs).
degrees scenario might be unsatisfactory for an asset owner
that strives to have a positive real economy influence in line
with associated targets.
10
Questions to explore investment approach and

INVESTMENT POLICY: CODIFYING A
objectives at the firm level STRATEGY
Asset owners should implement their investment policies
■■ When preparing for the manager selection and develop risk management, asset allocation and
process, reflect on: mandates accordingly. An investment policy should reflect
■■ How your strategy and policies constitute an an asset owner’s strategy and views on best practice in
approach that considers ESG factors. managing investments, including incorporating ESG factors.
See the PRI’s Investment policy: process & practice report
■■ How you plan to align a manager’s investment
for further guidance.
approach with your strategy and policy, and
what alignment means to you.
It is important to establish whether a manager’s firm-wide
■■ Please outline how your investment approach is investment policy reflects internal stakeholder consensus.
informed by global trends, including those related However, it is not uncommon for a management firm to
to sustainability. have more than one investment policy; a multi-asset, multi-
■■ Please describe how and to what extent ESG approach firm may be unable to formulate a single policy
risks and opportunities are incorporated into your that can serve its entire client, asset and product base. For
approach. multi-asset offerings, more detailed policies are often found
■■ What would you say are your competitive ESG at the strategy, business line and product levels. Policies and
strengths relative to your peers? term sheets, fact sheets, fund operational documentation,
risk management frameworks and marketing materials
■■ How do you operationalise a broad fiduciary
often overlap. At a specialist, more narrowly-focused
duty concept (cognisant of ESG factors) in your
manager, policies are likely to be expressed at the firm level.
investments?
■■ What are your objectives for ESG incorporation in A written investment policy should define what ESG
your investment approach? means to an investment manager in practical terms. While
■■ How do you ensure that ESG issues are embedded strong cultures may override weak policies, it is vital that
and systematically feed into all investment policies are recorded and endorsed by the board and CEO.
decisions? An assessment of the policy should indicate whether it is
■■ How do you review and update your investment compatible with an asset owner’s ESG-related definitions
approach? How do you monitor the relevance and expectations.
of your approach in a changing investment
environment? Any conflicts detected may be significant and result in
selecting a different investment manager, or establishing
■■ Do you use an ESG index benchmark or a standard
terms during the appointment phase (for an example in
benchmark with added ESG requirements?
private equity, see the PRI’s Incorporating responsible
investment requirements into private equity fund terms
guide).
Questions to explore investment approach and Asset owners should compare the policies of prospective
objectives at the product level managers, which is not always an easy task as they must
assess how managers address ESG factors as well as how
■■ How will you ensure that the product aligns with policies are adhered to. Policies that marginalise ESG
top-level firm approaches? considerations, or institutions that have separate ESG
■■ Are all firm-wide objectives and approaches policies, may compromise the depth of delivery across the
applicable to this product? If not, please explain firm on related objectives. However, a firm with a strong
why. culture of long-term independent and analytical thinking
might be a better fit than a firm with a well formulated
policy, but no relevant cultural commitment.
11
Questions to explore codifying policy strategy at Questions to explore investment time horizon at
the firm level the firm level
■■ Do you have a firm-wide investment policy that ■■ Do your internal incentive structures encourage
incorporates ESG considerations, or a separate ESG long-term investment?
or responsible investment policy? ■■ Please describe how long-termism has informed
■■ If the policy’s ESG elements are not firm-wide, your investment strategy, approach, policies and
which parts of the firm do they cover? processes.
■■ Which policy definitions do you use for ESG factors ■■ How has your organisation resisted short-term
across the firm? pressures?
■■ How often is your policy reviewed and has your ■■ Please give examples of how you promote the long-
approach to tackling ESG issues evolved over time? term success of the companies you invest in.
■■ How do you foster a culture of long-term
investment decision making at your firm?
Questions to explore codifying policy strategy at ■■ Are your ESG objectives clearly defined and within
the product level the appropriate time frame?
■■ Are you aware of, and aligned with, our investment
■■ If you have a product or asset class policy, does it time frame?
align with the organisation-level policy and/or have
a clear link to your firm’s investment approach and
objectives?
Questions to explore investment time horizon at
■■ How might ESG incorporation regarding this the product level
product change due to evolving (responsible)
investment policies?
■■ How do your ESG objectives match the investment
time horizon of this product?
■■ Please give examples of how you have promoted
INVESTMENT TIME HORIZON the long-term success of the companies in this
portfolio.
An asset owner’s ESG-related objectives should translate
into investment decisions with appropriate long-term time
■■ Please outline how portfolio manager and
horizons. For example, it can be difficult to achieve positive investment staff remuneration reflects the long-
real world impact and reap competitive returns with a high- term value creation mandate of this product.
turnover, short-term product as ESG factors tend to play out ■■ How does the portfolio construction process resist
over a long period of time. This also holds true culturally; for short-term pressures?
example, short-termism can manifest in unnecessarily heavy
trading patterns reflecting a firm’s management style.
While short-term metrics may be relevant at times, short- ASSET CLASSES

termism is neither desirable nor conducive to responsible An investment manager may not have the same level of
investment. High churn is likely to complicate active ESG competency across all asset classes. Managers’ firm-
ownership and make any positive real world impact or level practices may also not be fully suitable for all asset
ESG risk reduction difficult to monitor. Asset owners classes due to style, culture or resources. Asset owners
must be aware of this when selecting managers. For more should therefore ascertain how managers use ESG insight
information, see the PRI’s How asset owners can drive across asset classes. The extent to which ESG principles are
responsible investment - Beliefs, strategies & mandates embedded across the organisation may highlight cultural
paper. and/or staff competency deficiencies in less established
asset classes. When selecting an investment manager, asset
Investment process rigor and product integrity can owners should first look at the firm’s overall ESG alignment,
ultimately only be explored post-fact and by the asset then its capability in a specific asset class, and then a choose
allocation decision itself. It is also important to remember a suitable investment product. ESG capabilities related to
that cultural fit may not guarantee long-termism; asset specific asset classes within a mandate must be evaluated.
owners must remain critical of themselves and how they
conduct manager research.
12
The PRI’s asset class-specific guides is outlined below.

Questions to explore asset classes at the firm
The PRI has issued several asset class guides in recent level
years, including:
■■ Which asset classes does your ESG framework or
PUBLIC MARKETS policy cover?
■■ Does your investment approach, ESG staffing and
Listed equity
philosophy vary among asset classes?
■■ A practical guide to ESG integration for equity ■■ How has ESG incorporation evolved at your firm?
investing Which asset classes did you cover first?
Debt ■■ How do you incorporate ESG issues in the asset
class we target?
■■ Fixed income investor guide ■■ What is the depth of ESG product offering in the
■■ Corporate bonds: spotlight on ESG risks asset class we are interested in? How does that
■■ Sovereign bonds: spotlight on ESG risks compare to other asset classes?
■■ Shifting perceptions: ESG, credit risk and ratings –
part 1: the state of play
ESG Engagement for Fixed Income Investors -
■■
Managing Risks, Enhancing Returns (webinar)

GOVERNANCE AND ORGANISATIONAL
■■ Climate Strategies for Sovereign Bond Investors ARCHITECTURE
(webinar) A firm’s approach to investment governance will depend on
■■ ESG Analysis for Energy and Utilities Credit Analysts its culture, style and size. Certain investment approaches
(webinar) may also require a specific set-up of resources that needs
to be observed. For example, with quantitative and screen-
driven investments, the ESG function might be outsourced.
ALTERNATIVE INVESTMENTS
Sound governance ensures that a firm’s investment
Hedge funds approach is embedded throughout the organisation.
■■ Due Diligence Questionnaire for Hedge Funds
As the figure below shows, a dedicated ESG team (i.e.
■■ Responsible investment and hedge funds centralised structure) can be responsible for day-to-day ESG
incorporation.
Private equity
■■ Private equity LPs’ responsible investment due
diligence questionnaire Figure 2: Matrix analysis of the management dimension.
■■ Responsible investment in private equity: a guide for Source: Sustainalytics, IRRCi
limited partners
Decentralised Centralised
■■ Incorporating responsible investment requirements ESG ESG
into private equity fund terms management management
■■ Workshop on human rights in private equity:
summary and discussion
■■ IIGCC-PRI guide on climate change for private equity
investors Process to
ensure 1 2
E&S integration
■■ Impact Investing Market Map
REAL ASSETS
■■ Managing ESG risk in the supply chains of private No process to
companies and assets ensure
3 4
integration
■■ Responsible investment in infrastructure
■■ Sustainable real estate investment: Implementing the
Paris climate agreement – an action framework
13
Alternatively, all investment team members might Figure 3: Matrix analysis of the research dimension.
contribute to ESG insight and incorporate ESG factors Source: Sustainalytics, IRRCi
into decision making – also known as the integrated
model or decentralised structure. Meanwhile, many firms Narrow Broad
have adopted hybrid solutions combining elements of ESG ESG
research research
both. Governance transparency and quality of the chosen
structure is crucial and it is not possible to rank one above
the other (centralised versus decentralised) as a guarantee
of robust ESG incorporation. According to research by
the Investor Responsibility Research Center Institute Modified
(IRRCi), the management dimension of ESG incorporation ESG inputs 1 2
is fundamental to integration1, ultimately determining
its quality. Strong policies safeguard ESG incorporation
integrity regardless of organisational architecture.
Unmodified
Further information on organisational design choices
in ESG integration can be found in the PRI’s A practical
ESG inputs
3 4
guide to ESG integration for equity investing report.
Asset owners need to understand how investment managers

add ESG value across all their activities, and whether there
is a reasonable expectation that the governance process is
conducive to the owner’s ESG objectives. For example, if the The stability of external relationships is also an issue for
compliance, sales or marketing team oversees ESG-related asset owners looking for a long-term relationship. As
matters, individuals in the team must have the requisite firm-level ESG resourcing decisions are likely to filter
competency and authority to incorporate and analyse ESG down from the organisational level to the product level
factors. heterogeneously, it is important to discuss preferred
approaches at the most appropriate level.
Investment managers may also partly or fully outsource
their ESG activities using ESG indices, ratings, consultants
Questions to explore governance at the product
and engagement service providers in different stages of
the investment process. Therefore, evaluating a manager’s level
resources should extend to the quality and suitability of
its external vendors as a regular part of operational due ■■ Who is responsible for incorporating ESG factors?
diligence. What measures are in place to safeguard the long-
term stability of that structure and relationship?
If a manager outsources a component of its ESG Can we meet the team members?
understanding to an external partner, it is important to ■■ How will you ensure that there are no conflicts of
verify whether that manager is able to modify, monitor and interest regarding this product?
control those inputs.
WARNING: Unmodified and superficial external ESG

inputs may not positively contribute to the product in
question if implemented under a culture that does not
appreciate the value of ESG insight more generally.
Please see more detail in the IRRCi’s How Investors
Integrate ESG: A Typology of Approaches.
1 Please note that the IRRCi’s use of the term integration also includes passive management strategies and is typically expressed as ESG incorporation in PRI documents.
14
Questions to explore governance and

organisational architecture at the firm level
■■ Please describe your organisational governance

structure, roles and responsibilities when it
comes to ESG incorporation. Who oversees ESG
implementation?
■■ What governance structures are in place to address
conflicts of interests between clients, or between
managers and clients?
■■ What reporting systems and tools are used to
provide the required information for effective
oversight?
■■ Do you have a dedicated ESG team? If so, please
describe:
■■ the relationship between ESG specialists,
analysts and portfolio managers;
■■ the culture and balance of power between ESG
teams and other teams;
■■ where the ESG team is physically located
relative to portfolio managers; and
■■ how your risk team has been trained to deal
with and monitor ESG issues.
■■ If there is no ESG team, have mainstream analysts
and portfolio managers been trained on ESG issues
and what ESG research do they conduct? Has your
risk team been trained to deal with and monitor
ESG issues?
■■ What led to your decision to hire an ESG specialist
team, or what led to you decision not to hire ESG
specialists?
15
PORTFOLIO CONSTRUCTION AND
INVESTMENT DECISION MAKING
This chapter focuses on ESG in investment decision making
and portfolio construction, as well as on the risk and return APPROACHES TO ESG IN INVESTMENT DECISION
framework. Questions on how investment decisions are MAKING
made, how information is interpreted and what information Descriptive
is available are considered. How a manager perceives risk
Descriptive ESG generally means rules-based, as opposed
and return, and how that view can be used to invest with an
to normative ESG or principles-based (discussed below).
ESG mindset, will also be discussed, along with screening
Descriptive ESG works well for some asset owners due
and integration processes.
to its simplicity and ease of execution. These types of
measures and structures are relatively easy to assess
Questionnaires can be a useful information-gathering
when selecting an investment manager. They are also
tool for many of the themes discussed in this chapter.
easier to implement in the appointment phase and to
Few questions require examples, but the majority are
monitor and report on. Nevertheless, it is important for
well suited for a RfP/DDQ-type of document. However,
asset owners to understand the impact and limitations
while mechanistic investment processes can be covered in
of such measures. For instance, if a company is on an
questionnaires, a thorough assessment of ESG in portfolio
exclusion list, does that mean it should be disinvested
construction and decision making requires direct interaction
from all portfolios? And, if so, in what time frame?
between an owner and a manager.
Further considerations on how assets are subsequently
allocated, such as in the index, or only within the
One issue that asset owners often face is when a manager’s
sector from which the company was removed, must be
public report covers institutional aspects, with limited
considered. When a descriptive measure is used, asset
product-level information. Services that provide product-
owners should prescribe a list of rules.
level information on portfolio holdings exist, and as part
of their reporting to the PRI investment managers answer
Questions:
questions on ESG incorporation processes at the firm level.
However, true understanding can only be gained from well-
■■ Do you have an ESG exclusion or inclusion list, and
executed dialogue.
what governs these exclusions? Do you remove
companies from the portfolio for non-compliance
with the ESG policy?
INVESTMENT DECISION MAKING ■■ Do you blacklist countries and issuers, and which
An investment manager’s decision-making process must issues do these relate to (e.g. corruption, corporate
facilitate the realisation of an asset owner’s ESG imperative. governance, etc.)?
Investment managers must ensure that investment
processes incorporate ESG analysis, and that such insight Normative
is presented to investment decision makers (and that Normative ESG generally means principles-based, as
those decision makers are able and empowered to act opposed to being descriptive or rules-based. In cases
accordingly). where ESG incorporation requires a higher degree
of judgement by the investment manager, measuring
For example: compliance against an asset owner’s ambitions and
objectives is more complex. Asset owners must
■■ With active management and investment committees, understand if there are tangible metrics to evaluate ESG
either a designated and informed member brings ESG compliance, and work on creating them if they do not
considerations to the attention of the committee, or exist. For example, if a product needs to be managed with
all members are informed and targeting or actively the objective to remain within a +2 degrees scenario, an
considering ESG factors when they make investment investment manager would need to demonstrate how
decisions. this is being adhered to. This is a complex process for
■■ With a quant process, the algorithm would be designed which a descriptive approach would be inappropriate.
to embed ESG insight and use ESG data as input. Elaborating on the process and using measures of
judgement and best practices would be a more effective
History shows that ESG incorporation is likely to be less approach.
present in investment processes than is often anticipated
at a first glance of policies and process descriptions Questions:
in marketing literature. For example, in fixed income,
the PRI found in its recent work on credit ratings: “It ■■ Please describe how you merge financial and ESG
(ESG consideration) can be advisory in nature and the criteria during investment analysis.
responsibility often falls on ESG analysts alone to raise ‘red ■■ How often do you review the ESG risk exposure of
flags’. Hence, at this stage, full ESG integration appears the portfolio and how often have you changed the
some way off.” These observations are also supported by investible universe based on those findings?
recent IRRCi/Sustainalytics research on ESG integration.
16
Asset owners should verify that final decision makers use The PRI recently published a guide that discusses ESG
available ESG materials and organisational insight in their integration in public equity portfolios. The guide provides
investment decisions. They should also ask prospective further considerations and case studies for asset owners
managers to support any claims with evidence and real when it comes to understanding ESG factors in investment
examples to avoid “integration-washing”. decision making.
Questions to explore investment decision making

at the firm level
RISK-RETURN FRAMEWORK
RISK
■■ How does ESG incorporation affect your investment There are myriad views on and definitions of risk. For
decision making when it comes to investment example, an asset owner may perceive risk as the likelihood
valuations? that a result does not align with its long-term investment
■■ What challenges have you encountered during the goals or as surplus risk. For a long-only investment manager,
investment decision-making process, and do you risk is usually associated with deviation in return versus a
foresee any others related to your approach to ESG benchmark. For an absolute return fund manager, risk is
incorporation? often defined as not meeting a fixed return target.
■■ Please describe your firm’s investment decision-
making process: is there a single decision-maker, Asset owners must be clear about what risk means to them
a group process or a quant? Or do you take a at each level of the investment process, and how it can
different approach? vary across their portfolio. This is particularly important
as measures of risk linked and monitored in manager
■■ Please discuss the background and competency of relationships for investments within a portfolio may not
investment decision makers at your firm when it always reflect an asset owner’s long-term goals and overall
comes to ESG incorporation. plan perspective.
■■ To what extent are portfolio managers involved in
active ownership activities and able to use insight An asset owner’s ESG or strategic risk framework needs
acquired? to be embedded in mandates and followed through in the
selection process. One cannot expect that buying into a
mutual fund tracking the S&P 500 Index without exclusions
or tilts will comply with an investment policy or strategy that
Questions to explore investment decision making
states: “We see carbon exposure as the biggest investment
at the product level risk to our long-term performance”. Likewise, reputational
ESG risks such as potential labour and environmental
■■ Please give five examples of how ESG issues have controversies in an investment portfolio should be identified
influenced investment decision making. in an asset owner’s investment policy (and averted).
■■ How do you foresee ESG issues influencing
investment decisions? With expanding understanding of risk premia and
■■ What challenges do you anticipate in your ESG sophisticated portfolio risk analysis, asset owners are more
integration approach? able to uncover ESG relationships with all traditional risk
measures. The selection process should test a manager’s
■■ How do you interpret our ESG or responsible
ability to supply relevant analysis.
investment objectives, and how would you execute
investments that are aligned with our beneficiary
demands?
■■ What ESG data, research, resources, tools and
practices will be used to incorporate ESG factors
into the investment processes, valuations and other
investment decisions you make for this product?
■■ What are the main ESG factors affecting the
portfolio and why is this the case?
■■ How will you ensure that all material ESG data
available at the firm-level will be used to benefit this
product?
17
RETURN
Questions to explore risk framework at the firm Returns alone and ESG outcomes specifically are
and product level treated and targeted in different ways by asset owners
and investment managers. This may be due to differing
■■ What issues can materially impact your investment commercial strategies, investment competency, legal,
performance and why? Which risks do you monitor fiscal and tax systems, and may also reflect alternative
through your firm’s research? perceptions of fiduciary duty.
■■ How do you monitor long and short-term risks and
their investment relevance? Is your risk function The PRI’s Asset owner strategy guide: How to craft an
trained and resourced adequately to identify ESG- investment strategy guide encourages asset owners to
related risks? explore their views on megatrends influencing the future
■■ What are the major ESG risks you identified in investment environment and real economy impacts to
individual holdings and what are you doing to determine how their institution can best generate returns
mitigate them? Can your investment teams access (see here for a recent report on megatrends). As the
thematic ESG risk research? diagram below demonstrates, for some market participants,
investments only have financial risk and return aspects,
■■ How would you respond if you identified an while for others a third dimension – real world impact – is
investment with significant ESG risks? also contemplated.
■■ How do your views on minimising reputational
risks align with our views and product policies and Investments always have several real world impacts that can
terms? be positive and/or negative (for example, they may increase
■■ How will you mitigate ESG risks in holdings? How or decrease pollution levels, generate corporate and income
does the product benefit from firm-level risk taxes, support employment, create discrimination or be
research? inclusive, etc.) and are intertwined with long term prosperity.
Asset owners and the investment chain more generally
■■ How will you minimise or eradicate reputational
that limit analysis to the two main dimensions covered in
risk?
the diagram below (risk and return) are missing a crucial
Figure 4: Real world impact as a third dimension to risk/return considerations.
c t
pa
im -
orld
a l-w
+ Three investments with same
Re +
Risk-Return profile +
A B C C
B
Return
Return
Same three investments,

but with real world
impact plotted
-
-
+ - + -
Risk Risk
18
element in their portfolio’s contribution to end beneficiaries When it comes to selection, asset owners need to be aware
and society as a whole. of portfolio construction trade-offs and a manager’s ability
within these constraints to make decisions that best serve
Ideally, a manager will deliver positive real world impact their long-term goals.
that is aligned with an asset owner’s needs as an integrated
aspect of their risk and return considerations. Clarity on real
economy expectations during the selection phase will help Questions to explore portfolio construction at
to align interests for a productive long-term commercial the firm and product level
relationship.
■■ How often do you review or change material ESG
factors that inform portfolio construction?
Questions to explore return framework at the ■■ What are the key considerations after we have
firm and product level granted you a mandate in terms of the investable
universe of this product?
■■ How do you monetise future financial returns by ■■ Please describe relevant portfolio construction
participating in megatrends?
criteria you use and monitor, and how ESG issues
■■ How do you integrate externalities into your interact with such criteria.
investment return framework? ■■ How will you mitigate ESG risks in the holdings and
■■ Are ESG factors assessed as part of the financial reflect this in portfolio construction, monitoring
return or separately? and rebalancing? How does firm-level risk research
■■ How will the ESG performance of investments inform portfolio construction?
impact your financial models and company ■■ If you remove a stock, sector or country from
valuations? an index, how do you adjust the weight of the
remaining stocks and consider ESG issues in the
process?
PORTFOLIO CONSTRUCTION
In portfolio construction, it is not just a question of what
goes in, but how much goes in. Parameters like tracking THEMATIC AND SCREENING
error are important as they directly influence choice of
investments, but may not be critical.
APPROACHES
Thematic and screening approaches choose investments in
Portfolio construction (stock selection) is arguably more securities that fit into certain criteria and play increasingly
important for active than passive managers, as deviations important roles in asset allocation considerations. Asset
from a benchmark determine their success. However, owners should pay close attention to the methodology,
portfolio construction should not be underestimated in a rules and accuracy of chosen screens during the selection
passive context, particularly when passive strategies extend process.
beyond pure index replication.
For example, an asset owner might have a mandate which ALIGNING EXCLUSIONARY POLICIES WITH
screens (ESG or non-ESG) out stocks that represent 5% INTERNATIONAL CONVENTIONS
of the investable universe. If the tracking error needs to One way an asset owner may approach negative
be kept similar to the pre-screen level, that 5% then needs screening is to align its exclusionary criteria with the
to be allocated to the other names within the index. The United Nations’ system of internationally-agreed
allocation could be divided equally, weighted towards names conventions. For example, UN Global Compact has
with better or even worse ESG scores, or with a lower recently excluded from its membership companies
carbon footprint; names with the highest correlation to the that participate in tobacco and controversial weapons
stocks removed from the index; or derivatives can be used sectors – leading many investors to also reconsider their
to create exposures, etc. All options have consequences. involvement. See more on tobacco exclusion on UICC and
Removing holdings with the highest carbon footprints may Tobacco Free Portfolios.
result in an over-allocation to the lowest carbon performers
in the sector or an index, impacting correlations and
shifting expected risk and return among other portfolio
characteristics. In some cases, such as if countries are
removed based on ESG ratings or issues, only a very
narrow investable universe may remain. This could hinder
portfolio construction by introducing capacity constraints or
impacting liquidity.
19
For example, a positive screen where 50% of the top ESG INTEGRATION
performers are included in an index can be executed by
analysing all the stocks in-house, by licensing an index Integration relates to the process of embedding ESG
or using ESG scores to design a screened portfolio. A considerations into fundamental investment valuation
question here would be which process is the asset owner and related engagement, and applying insight acquired to
comfortable with and how would choices be reflected in investment decisions. For detailed examples in equity, please
fees charged. refer to the PRI’s A practical guide to ESG integration for
equity investing. The chapter entitled Assessing external
Another example where accuracy would be a crucial managers outlines what asset owners need to know about
element is a negative-screening product where a significant integration. In the manager selection phase, a key objective
reputational risk item for an asset owner is excluded. How for asset owners is to assess the quality of a manager’s
can a manager assure that the portfolio is always compliant? integration practices against their own expectations.
A discussion on the reallocation of an investment that has
been screened out would also be needed. An intuitive way to ascertain the effectiveness of an
investment manager’s integration approach is to consider
A themed investment screen might target companies the price of an investment firstly with, and then without,
where women represent over a certain percentage of ESG factors accounted for. ESG integration should produce
management, or bonds that finance social projects. The distinct outcomes in asset price, Discounted Cash Flow
quality of data used for screening is important, including: (DCF) models, credit spreads, internal rates of return,
the use of ESG ratings (how often ratings are updated); the etc. – or an explanation as to why there is no difference.
use of carbon footprinting (scope of the exercise); and the The investment manager should be able to attribute some
use of indexes that satisfy particular thematic requirements. value and/or have an informed discussion on the topic and
It is important to understand how managers can overcome why integration is applied – or indeed why it is not applied.
liquidity issues in thematic products, funds or indices Understanding what drives the valuation differential will help
construction in areas where the underlying supply is limited. asset owners understand the integration process, and sheds
light on how the prospective management team plans to
Selection processes targeting alternative or smart beta select investments.
products must consider how the index, with its inclusion of
ESG considerations, alters the desired single or selection of Activities portrayed as “integration” often merely amount
active beta factors. to simple screening, whereas integration done well is a
powerful method of fundamental analysis. From a value
for money perspective, the importance of understanding
integration is heightened as products claiming ESG
Questions to explore thematic and screening integration are active products and levy active product fees.
approaches at the firm level It is important that those asset owners that are willing to
pay for genuine insight receive such insight and, ultimately,
■■ Do you use positive or negative screening? If so, investment performance.
please describe the process – how are screens
defined?
■■ Is the screening binary (negative or positive) or
does it assign a different weighting based on which
investments are selected?
■■ What data do you use for screening and who
provides it, or is it performed in-house?
■■ Do you have a cut-off score in carbon or ESG
ratings? If so, how is it set?
Questions to explore thematic and screening

approaches at the product level
■■ Please describe how you monitor your investments

and the portfolio for ESG compliance and risks.
■■ What external data will be used for investment
decisions?
20
Questions to explore integration at the firm level Questions to explore integration at the product
level
■■ How are ESG factors integrated into your firm’s
investment analysis and decision-making processes ■■ How are ESG factors integrated into investment
(e.g. portfolio construction, fundamental sector analysis and decision making?
analysis, stock selection, etc.)? ■■ How will ESG information be used by the
■■ How is internal and external ESG data used by the investment team responsible for this product?
investment team? ■■ How is the investment team incentivised to
■■ How do you determine materiality and calculate integrate ESG factors into investment decisions?
potential investment impact in the short, medium ■■ Please describe your integrated analysis and
and long term? valuation process for this product.
■■ How is the investment team incentivised to ■■ Please list the most material ESG issues and themes
integrate ESG factors into investment decisions? that impact the portfolio and outline your views on
■■ Please provide examples of valuation with those issues, their materiality and future trajectory.
integrated ESG versus standalone financial analysis. ■■ What weighting do ESG factors have on the
■■ How do your products that integrate ESG issues decision-making process and investment decisions
differ from those that do not integrate ESG issues? of this product?
■■ Please provide examples of the connection ■■ How does this product differ from similar
between active ownership activities and ESG products offered by your peers in terms of ESG
integration. performance? What is your competitive advantage?
■■ How do you use ESG information to identify ■■ Please provide insight into portfolio-level ESG
investment risks and opportunities? analysis (for example, ESG scores relative to the
■■ How have you invested in integration competency, benchmark, carbon footprinting), including specific
processes, staff and supporting infrastructure? stocks or sector decisions which drive under or
■■ How will systemic trends, themes or issues overperformance.
be integrated into financial decision-making
processes?
■■ Do you follow an ESG benchmark or index?
■■ What weighting do ESG factors have on the
decision-making process and investment decisions
across the firm?
■■ How do you identify and manage ESG risks and
opportunities, and use ESG factors to add value to
investment decision making?
■■ What ESG data, research, resources, tools and
practices do you use to integrate ESG factors into
investment processes, valuations and decisions?
21
IMPACT INVESTMENTS
While still a niche market, impact or environmentally
and socially-themed investment volumes have grown
considerably over the last decade. Indeed, the PRI is
currently working on an Impact Investing Market Map that
gives information about 10 types of impact investments.
The map helps investors understand the criteria that can be
used to identify if and how these investments contribute to
sustainable outcomes.
Asset owners that wish to include impact investments

in their portfolios should seek to understand how their
managers define impact and how they seek to measure such
impact. One problem facing the industry is the branding of
certain funds as impact investments without a clear link to
impact contribution. It is therefore vital that asset owners
help to maintain the integrity of the market by choosing
products and funds that genuinely deliver positive impacts.
Impact investments tend to be concentrated in private
equity and debt investments.

Questions to explore impact investments at the
firm level
■■ What tools or performance standards do you use to

measure impact?
■■ What is your process for determining materiality
and calculating potential investment impacts and
real world impacts in the short, medium and long
term?
22
ASSESSING ACTIVE OWNERSHIP

THROUGH ENGAGEMENT AND VOTING
This chapter looks at how asset owners can be effective
stewards of their assets and, if such functions are DEFINITIONS
outsourced, determine how an investment manager deals
with stewardship and active ownership issues. The topic of Active ownership is the use of the
active ownership is split into engagement and voting. Both rights and position of ownership to
activities have distinct characteristics that asset owners influence the activity or behaviour
should be aware of in the selection process. of investees. This can be applied
differently in each asset class. For
Active listed equities, it includes both
ENGAGEMENT ownership engagement and (proxy) voting
(including filing shareholder
Asset owners can engage with companies on three levels: resolutions). For other asset classes
(e.g. fixed income), engagement may
1) Direct engagement. still be relevant while (proxy) voting
2) Collaborative engagement (may include asset owners may not.
and investment managers and is unlikely to be the sole
method of engagement). Engagement refers to interactions
3) Outsourced engagement: between the investor and current
or potential investees (which
a. carried out by an investment manager (who may
may be companies, governments,
sub-contract to service providers); or
Engagement municipalities, etc.) on ESG issues.
b. carried out by a specialist service provider (directly Engagements are undertaken to
contracted by an asset owner) influence (or identify the need to
influence) ESG practices and/or
COLLABORATIVE ENGAGEMENT improve ESG disclosure.
It is often the case that a single asset owner or manager
represents a very small part of a company’s overall capital. A (Proxy) Voting refers to voting on
group of investors of the same standing therefore tends to voting and management and/or shareholder
have a higher chance of engaging successfully compared to shareholder resolutions as well as filing
one single voice. resolutions shareholder resolutions.
Collaborating with peers also facilitates the dissemination

of best practices across the industry. Insight from peers
can give asset owners confidence during the selection OUTSOURCED ENGAGEMENT
process to identify whether an investment manager is The process that an investment manager uses to engage,
lagging or setting an example in engagement. Understanding as well as its perceptions of engagement, should always be
collaborative engagement tools the investment manager assessed. Does it see engagement as a fee-sapping evil or as
may use, such as the PRI Collaborative Engagement a genuine opportunity to add value? It is also important to
Platform, can also aid the selection process. understand the semantics around engagement and voting,
as some managers may promote pure voting activities as
engagement. Engagement activities can directly impact
Questions to explore collaborative engagement financial performance.
■■ Do you have a structure in place to collaborate with Equally, asset owners must understand a service provider’s
peers on company engagement? Please give recent intentions (whether that service provider is a manager or
examples if so. an engagement specialist mandated for the task) when
they engage. An investment manager’s engagement should
■■ How do you exchange best practices with peers and
arguably always be instrumental to stronger investment
help disseminate these?
performance, whereas a service provider’s (a pure
engagement provider) engagement approach can reflect a
wider set of drivers in asset owners’ strategy and policies.
23
If a purely instrumental view is held, an asset owner Meanwhile, passive investments are not necessarily blind.
should measure the cost-benefit ratio of the engagement For example, factor investing can be considered as passive,
activity it is willing to support. It is important that asset although such investments do not follow a benchmark
owners explore what motivates them to engage and then blindly – meaning all investment decisions are essentially
ensure that that perspective is followed through. An asset active. With such strategies, engagement on specific ESG
owner may outsource engagement if a product does not issues can and should be implemented, and the selection
offer an engagement overlay or share their motivations process should consider a manager’s approach to this.
for engagement. It is also possible that a manager does
not address engagement needs but provides investment Using service providers
products that incorporate ESG factors into investment When engaging through service providers, asset owners
decision making. should ideally define topics to raise, as well as companies
to target and objectives to achieve (this may be done via
Asset owners should ask for examples of how a manager’s a policy or as a more hands-on, one-off exercise). Asset
engagement approach is structured. Identifying the owners must reference topics and goals during the selection
individuals responsible and understanding the processes process and then monitor providers based on what has
involved is a good first step, with ascertaining how those been agreed. Asset owners should be ready to participate
individuals interact with investment decision makers a good in some of the engagements they care most about and
second step. Examples of recent engagements and their establish in the selection and appointment process how
outcomes are useful in assessing a manager’s engagement such arrangements will work.
capability. It is also important to understand if engagements
are initiated across all the manager’s assets. If the manager
outsources engagement to a third party, asset owners Questions to explore engagement at the firm and
should ask about the terms of the arrangement and the product level
sustainability of it.
■■ How do you engage with companies on ESG issues?
Beyond targeted engagements, asset owners should analyse
the relationships a manager may have with the firms it
■■ Is the engagement process structured or is it
invests in. It is rare (but possible) that routine analyst and handled on a case-by-case basis?
portfolio manager dialogue already covers ESG issues and ■■ How do you use ESG portfolio information to
no further engagement is therefore required. Asset owners identify opportunities or targets for engagement?
must be confident of staff ESG competency in such a case. ■■ How do you ensure ESG factors are integrated into
It is also unlikely that principles-based issues are considered investment decisions, including insight gained from
in engagements that are driven purely from a portfolio engagement activities?
management perspective. ■■ Please give evidence of a connection between
active ownership activities and portfolio-specific
Active versus passive alterations in investment decisions.
Asset owners should have the same fundamental
perspective on engagement regardless of whether an active
■■ How will you engage with companies on ESG issues
or passive strategy is in question. Passive products are for this product if it differs from your firm-level
often chosen to limit the cost of managing assets and any practice?
engagement overlay may negate that. However, it could be ■■ How does information from engagement affect
argued that the stewardship role an asset owner assumes by investment decisions for this product? Please give
investing on beneficiaries’ behalf has a cost implication – in examples.
the same way as does the management and administration ■■ How are you planning to use engagement service
of a fund. Therefore, engagement costs are part of running providers for this product, and how will you ensure
asset owner activities. This is particularly true when it they meet our needs?
comes to voting (discussed ahead). The old adage “if you ■■ If you use service providers as consultants, do you
can’t sell, you must care” to safeguard your investments
have a policy to provide focus for those providers
further encourages long term passive asset holders to
and clearly outline what is expected of them?
engage. They have a general interest to manage negative
externalities (such as corruption or climate change) which ■■ Would you consider disinvesting from a company
could damage the economy or sector in question. that does not respond to shareholder engagement?
■■ What are your service provider’s commitments
regarding ESG expectations and are they able to
handle differences among various asset owners’
policies?
24
Asset owners must also make extra effort during the VOTING
selection process to verify how portfolio managers and
analysts responsible for making investment decisions There are often two starting points associated with voting:
receive the information collected through engagement
activities. 1) An asset owner has its own voting policy in place and
looks for an investment manager that can implement it
SELECT ENGAGEMENT STUDIES via:
a. segregated execution (shareholder rights remain
■■ Elroy Dimson, Oğuzhan Karakaş and Xi Li analysed with the asset owner);
CSR engagements with US public companies from
b. pooled execution (shareholder rights remain with
1999-2009 on ESG issues in the Review of Financial
the investment manager and it is rare for an asset
Studies (volume 28).
owner to impose its voting policy on such funds).
■■ Gordon Clark, Andreas Feiner and Michael Vies’
2) An asset owner does not have a distinct voting policy
From the Stockholder to the Stakeholder: How
and relies on an investment manager’s standard voting
Sustainability Can Drive Financial Outperformance
practices, regardless of the fund structure.
includes a chapter on active ownership.
■■ Paul Gompers, Joy Ishii and Andrew Metrick find that
When selecting a manager, asset owners should ask
responsibility and profitability are “complementary”
about the voting process, including in terms of quality and
in Corporate Governance and Equity Prices.
suitability of execution, as well as any professional parties
■■ See Terry McNulty and Donald Nordberg’s involved.
Ownership, Activism and Engagement: Institutional
Investors as Active Owners.
Figure 5: An example of a common voting chain for a segregated account structure
Vote
Proxy Voting Policy Proxy Research
Recommendations
Proxy
Research
Vote Decisions
Meeting
Processing
Voting Vote Instructions Agenda Vote
Votes Processed
Services Received Reconciliation Confirmation
Ballot
Processing
Record Keeping &
Reporting
In the voting chain, a policy – from an owner or a manager reaches the ballot. The voting chain reverses and the results
– forms the basis for all voting under regular circumstances. are reported to an asset owner and/or manager for further
Asset owners or managers then often appoint proxy service considerations, including commencement or ceasing of
agencies to help them formulate voting recommendations engagement activities and/or input into investment decision
for specific issues and/or companies based on the making, with the potential for divestment.
overarching policy. Actual voting decisions are then made
based on the proxy research recommendations and other From a selection perspective, asset owners need to ensure
factors such as feedback from engagement activities. Future the mechanistic aspects of the voting chain function
voting intentions, if ascertained in good time, may inform properly, that quality service providers are obtained and
engagement activities ahead of any meeting. votes reflect their target(s). Voting can become a technical
and complex issue with potentially multiple jurisdictions
For the actual AGM vote, voting decisions are passed into involved. Asset owners must also ensure that all insight
execution where another set of service providers are gained during the process is incorporated into future
engaged to execute the vote and confirm that that vote decision making across their assets.
25
VOTING POLICY
Asset owners should have an investment policy in place that
Questions to explore voting policy at the firm
includes their active ownership perspective, with voting a level and product level
key component. The PRI’s recent report, Investment Policy:
Process & Practice - A Guide for Asset Owners, outlines ■■ Do you track which strategic changes in corporate
how to formulate and review a policy. A clear policy makes actions are attributable to voting outside the
any service provider or manager selection process easier default options, e.g. a vote against a general AGM
– to a simple question of how well they can implement agenda item?
the policy. Focus will be on the processes described ■■ Do you evaluate proposed company directors
previously, effectiveness of voting (cost and impact) before the AGM/EGM? What process does this
and responsiveness of the process. Asset owners must involve?
determine whether a manager has the capacity in-house ■■ What actions have you taken to support ESG-
and/or a quality third-party service provider retained. related director appointments or to remove
directors associated with ESG-related failures?
In a situation where an owner’s voting policy is clear,
the chosen investment product plays a key role. With
■■ How will you ensure that our policy is adhered to in
segregated products, effecting an asset owner’s policy is all situations?
a relatively straightforward task. With a pooled product, ■■ Have you (co-)issued any shareholder resolutions at
an asset owner should still endeavour to include its voting AGM/EGM events? Please give some examples, and
policy directions. An investment manager’s ability to adhere the results of the resolution.
to potentially diverse instructions would then become a key ■■ How will you act in a situation of misalignment
differentiator in selection or an asset owner would need to between your standard voting policy and ours?
find a pooled product where the manager’s voting policy ■■ Are there are any voting options you do not want to
aligns with its own policy. Groups of smaller asset owners
implement in your own name?
can develop a customised voting policy and ask a manager
to implement that policy for the percentage of holdings ■■ Have you supported previous activist stances by
they collectively have in the fund. Flexibility for such activity other investors with regards to board nominations
would need to be addressed during the selection process. and proxy access? Please give examples.
■■ How may I vote against director appointments in
If an asset owner is unclear about its own voting policy, or the context of this product?
does not have a policy and is searching for an investment ■■ What capacity to evaluate company directors will
manager to vote on its behalf, the underlying manager be available for this product?
voting policy needs to be examined. Any discrepancies
between an owner’s views – in cases where an owner has
no policy – and a manager’s policy need to identified. Any
misalignments should manifest during the selection process
and potential solutions should be discussed.
26
VOTING PROCESS VOTING OUTCOMES

On the basis that an asset owner has a clear view on what Beyond checks and balances on whether votes were
voting should achieve, the next stage is to find a manager registered and reached the ballot, evaluating voting
with a robust voting execution process – from registering outcomes should take place at the company and portfolio
instructions to reporting on voting outcomes. An investment level. Voting against increasing the compensation of
manager that cannot cast two different votes for separate management that is failing to deliver is a standard example.
funds would probably be unsuitable for an asset owner An asset owner can question if a vote was successful in
seeking to strictly implement its own guidelines. Securities reducing the compensation, or preventing an increase, and
that are not segregated cannot generally be voted on how an unsuccessful vote changes future activity (such
separately; the segregation process would be lengthy and as a change in directors or blocking re-election of the
might incur an additional fee. Dynamics like these need to compensation committee). An unfavourable outcome might
be well understood and accounted for in the selection phase lead to the portfolio weight of the stock being reduced. A
and weighted against an asset owner’s voting requirements. higher allocation or assigning higher ESG ratings to more
responsive companies is an alternative if a positive outcome
An investment manager may have in-house voting is reached. The selection process should show how an
capabilities or it may outsource to service providers. It is also investment manager can deliver basic outcome information
important to understand how, or if it is possible, for an asset to an asset owner as well as inform its own decision-making
owner to potentially bring voting in-house or keep voting process and how voting impacts this.
back altogether under special circumstances.
Questions to explore voting outcomes at the firm

Questions to explore the voting process at the level and product level
firm and product level
■■ Please explain how information acquired from
■■ What are your proxy voting guidelines and do you voting is translated into investment decisions, with
vote on behalf of asset owners? examples of previous cases.
■■ Is a structure where the asset owner retains ■■ Are the results of those votes public or private, and
its voting capability available? If so, how does it are they measurable?
function? ■■ If you vote on behalf of asset owners, what
■■ How do you separate funds with potentially has been the track record of voting against
different voting guidelines? management? What process led to that vote?
■■ How do you approach potentially different ■■ Would a responsive management team, which acts
ownership rights across assets and asset owners? on your voting, lead to a larger allocation to the
company versus its peers?
■■ Do you separate shares for different votes to allow
for asset owners’ voting guidelines to be adopted, ■■ How much say will we have when it comes to
or are all votes for all holdings in that company the disinvesting or reducing allocation from our
same? portfolio in the context of this product?
■■ In delegated voting decisions, do you use a ■■ How will you measure specific engagement results
consultant or an in-house team? for this product? Will they be publicly available?
■■ For this product, how do you approach potentially
different ownership rights across asset classes and
asset owners?
■■ How will you ensure that our voting policy is
consistently deployed?
■■ Who is responsible for the voting process?
27
SECURITIES LENDING AND DERIVATIVES
Some investment managers lend equity and bonds to
boost portfolio returns by the margin earned from lending.
If those securities are not recalled in time to exercise
voting, the borrower is entitled to vote them. Negative
publicity might result in controversial votes in stocks with
concentrated ownership. Similarly, selecting a product that
provides synthetic exposure to a stock or an index through a
derivative might not come with voting rights. Buying into an
ETF would typically mean no voting rights on the underlying
securities. While these questions mostly affect and should
be dealt with at the general investment policy level, the
selection process can shed light on how investment
managers can help to manage such issues.
Questions to explore securities lending and

derivatives at the firm level
■■ To what extent does your strategy allow for

securities lending?
■■ To what extent does your strategy allow the use of
derivatives?
■■ To what extent does your strategy allow for off-
balance sheet exposure?
■■ What is your approach to securities lending? What
influence will you give us in this context? How will
you ensure that our voting policy is executed across
all of our securities?
28
REPORTING
The selection process should consider the ongoing reporting

from the manager to the asset owner and satisfy the latter’s Questions to explore reporting at the firm and
internal investment-related information requirements, product level
as well as be able to accomodate their own reporting to
stakeholders. ■■ Please provide reports reflecting ESG integration
activities, performance and impact. What is the
An investment manager’s external reporting covers all level of detail and frequency?
directly published information, as well as items where ■■ Please demonstrate how you communicate ESG
information is contributed to public reporting platforms
integration performance to your stakeholders
(such as the PRI Reporting Framework). Naturally, some
(e.g. to executives, the board, investors, staff,
information is not public and only available to certain clients.
consultants, service providers and intermediaries).
The public reports, newsletters, fund performance reporting ■■ Please explain how your ESG process relates to the
of investment strategies and other public information PRI Reporting Framework.
showcase an investment manager’s capabilities. PRI ■■ What performance indicators do you use to
Transparency and Assessment Reports provide further measure and report on your ESG impact?
information on the subject. Asset owners, or their ■■ Are you willing to share your PRI Transparency and
consultants, should thoroughly review public information in Assessment Reports with us?
the longlisting stage of manager selection and avoid asking
■■ Please provide an exsample of how you would
more general questions later on. Asset owners should
like to report to us about the performance of this
instead be specific in their requests and raise KPIs and other
product.
issues in direct exchanges with managers.
■■ What performance indicators will you use to
In the same way that asset owners can use the PRI measure and report on ESG impact or integration
Reporting and Assessment Framework to obtain for this product?
information about prospective investment managers,
investment managers can use it to gain knowledge about
asset owners. In addition, public information on an asset
owner’s website and annual reports may provide information
on the asset owner’s investment strategy and policy.
29
PRACTICAL TIPS FOR MAKING
SELECTION DECISIONS
This guide has so far focused on the various areas to Such models tend to feature four or five stages and can be
evaluate when assessing a manager’s ESG-related generically described as the following:
investment approaches and capabilities. This final chapter
offers practical ideas for bringing ESG matters raised 1. Identification of the manager universe (qualification)
during the manager selection process together in order to 2. Quantitative screening (creating a longlist, verification
facilitate ultimate decision making. It takes into account of the information)
generic models for the manager selection process, the
3. Qualitative screening (creating a shortlist, RfPs)
organisational ownership structure of ESG assessment and
scoring methodologies. 4. Due diligence visits (analysis of the shortlist)
5. Portfolio inclusion
GENERIC MODELS FOR THE MANAGER The content and descriptions of each stage will depend
on the organisation in question - its philosophy and the
SELECTION PROCESS competitive advantage being promoted. The areas of
There are several overviews of the manager selection focus within each stage are also fluid depending on an
process that asset owners can refer to, primarily from organisation’s overall investment approach.
organisations offering manager research and selection
services. We see value in all approaches and this guide has highlighted
areas of exploration when it comes to understanding
the role of ESG in manager selection, without outlining a
standard process. The areas covered can fall into various
stages in different taxonomies.
Figure 6: General manager selection process model. Source: The PRI
MANAGER UNIVERSE
QUANTITATIVE MANAGER SCREEN
QUALITATIVE MANAGER
SCREEN
RECOMMENDED
MANAGERS
CLIENT
PORTFOLIO
30
SCORING METHODOLOGIES
While the stages of manager selection may flow differently on various dimensions should be developed with weights
among organisations, there is common ground when it that correspond to organisational priorities. Scorecards will
comes to methods of assessment. A scoring system based vary in complexity, structure and levels of narrative.
Figure 7: A simplified scorecard example (with common headings identified in selection criteria research).
Figure 8: Regional differences in asset manager selection criteria. Source: Market Strategies International.2
Rank UK US Nordics France Germany Italy Netherlands Switzerland
1 Organisational Integrity and Brand and Financial Research Research Brand and
Local presence
stability transparency reputation stability process process reputation
2 Investment Investment Investment Financial Investment Financial Product Investment

team philosophy performance stability performance stability innovation performance
3 Assistance Assistance Third-party

Financial Research Service and Research Investment
with regulatory with regulatory external
stability process support model process team
compliance compliance ratings
4 Integrity and Investment Investment Organisational

Alignment Local presence Local presence Local presence
transparency performance team stability
5 Investment
Investment Service and Brand and Relationship Investment Service and Financial
philosophy
philosophy support model reputation management philosophy support model stability
2 Cogent ReportsTM International Institutional Investor BrandscapeTM. August 2016
31
ESG SCORING A standalone assessment could involve sending a reporting
or selection questionnaire to a prospective manager (or
When it comes to scoring ESG capabilities, considering and an existing manager if regarding an appraisal) and then
assessing the elements discussed in this guide, asset owners benchmarking it against a universe of managers.
have two main options:
A process tool uses the below heat map to assess individual
■■ Integrated approach: ESG scores are integrated into a manager scores.
scorecard of all or several dimensions via sub-indicators,
with indicator explanations and scoring schemes The Wespath Analytical Insights - ESG Integration
describing desired ESG-related behaviours. Evaluating and Monitoring External Asset Manager
■■ Standalone approach: A specific ESG selection Performance report also provides questionnaire examples,
scorecard with its own indicator explanations and indicator definitions to use in assessments and further
scoring schemes to be integrated as a dimension in the elaboration of using the process as an annual assessment of
overall manager selection scorecard. managers’ ESG competency.
Given the relatively nascent nature of ESG, best practice In organisations where ESG efforts operate as a distinct
is typically approached in a standalone manner, driven pillar of the overall investment function, the team or
by dedicated teams or individuals. This has ensured ESG individual responsible generally designs and conducts ESG-
insight is given sufficient exposure vis-à-vis more integrated related selection due diligence. Although this bodes well
selection elements, prompting ESG as a discipline to gain for resource allocation efficiency, ESG staff should act in a
wider organisational acceptance and allow ESG competence consultative manner with other investment teams and/or
to expand. staff responsible for the full selection process for ESG to
become a more integrated activity.
Figure 9: Sample of individual manager assessment. Source: Wespath’s 25 ESG Indicator Framework (active managers)
1. Policy and
Firm Level
Resources (25%)
ESG Policy E,S,G + Materiality ++ Active Integration Oversight ++ Refreshed + PRI Signatory +
(20%) ü ü Ownership ++ Process +++ ü ü
Dedicated Collaboration Use of External Dedicated

Resources (5%) and Initiatives + Resources + Personnel ++
ü
2. ESG
Integration Strategy Level
(50%)
ESG Strategy E,S,G + Materiality ++ Risk and Influences Systematic/ Knowledge ESG Reporting
(50%) ü ü Opportunities Decision Making Process Building ++ +++
++ +++ Implementation ü
++
3. Active
Firm and Strategy Level
Ownership (25%)
Engagement E,S,G + Strategic +++ Impact +++ Public Policy +

(12.5%) ü
Proxy Voting Own Guidelines E,S,G + Active Voting Assurance +

(12.5%) +++ +++ ü
+++ ++ +
Primary indicators Secondary indicators Tertiary indicators
32
Figure 10: Sample performance snapshot. Source: Wespath
Performance snapshot: external public equity managers
Managers A B C D E F G H I J K L M N O Manager P Q R
1. Policy and
Resources
ESG Policy
Dedicated
Resources
2. ESG
Integration
Integration
Strategy
3. Active
Ownership
Engagement
Proxy Voting
Overall Score 100% 100% 98% 97% 86% 79% 78% 75% 69% 67% 61% 55% 42% 34% 30% 30% 19% 19% 13%
Momentum ↑ ↑ N/A ↔ ↔ ↑ ↔ ↔ ↑ ↔ ↔ ↑ ↑ ↑ ↑ ↔ ↑ ↔ ↔
Category Race Leaders Chasing Pack Starting Grid
33
ESG ANALYTICS, FUND RATINGS AND ONLINE TOOLS IN SELECTION
Asset owners now regularly deploy ESG fund ratings and analytics tools, supplied by several large and small data providers,
in manager selection. Ratings are available for equity and fixed income products and cover a considerable volume of funds
available. Analytics tools allow asset owners to compare funds at multiple levels of granularity – from an aggregated
ESG score down to a detailed sub-category item under a specific indicator. Analytics tools allow highly customisable
information searches and can provide ESG momentum information. Tools can be used in any context - whether the focus
is on an ESG-specific fund or a non-ESG strategy. Findings may be surprising and highlight a lack of ESG integration in
ESG-branded funds or a seemingly high ESG component in non-ESG products. ESG views can be part of regular fund
assessment tools or specialist tools for ESG. Tools can integrate factor analysis to supplement fund fact sheets and help
asset owners understand how the ESG characteristic of a fund interact with other fund dimensions and performance
attribution.
Some scoring products rank funds in peer group percentiles of individual E, S and G scores or carbon intensity. Rankings
may be relative to all funds or a specific peer group. Rankings and/or analytics can offer insight on the potential impact of
a fund, seek to help clarify ethical perspectives or give insight on concentration of ESG risks.
When an analytics tool or fund rating is used, it is crucial that the asset owner is familiar with the service provider’s
methodology that underpins all assessments. For example:
■■ Methodologies can rate individual funds by assessing underlying holding ESG scores, either as an aggregation or split
into separate component parts, and provide an ESG snapshot based on a point in time.
■■ Methodologies may compare and analyse the investment processes of management firms in question and bring that
information into fund scoring.
■■ Combined approaches of the above.
Asset owners need to decide what type of analysis satisfies their needs. Methodologies and products are still relatively
new but are developing and maturing rapidly (e.g. greater coverage of number of holdings in a portfolio, inclusion of
process parameters, greater number of data points, timeliness of underlying data, dynamic content). Rating and analytics
products tend to concentrate on the backward-looking ESG data footprint of a defined subset of issues in a portfolio.
While such ranking or rating products offer easy, relatively low-cost access to a high volume of quantitative data, the
approach can potentially be criticised for its simplicity and sometimes unintentionality of conclusions.
It is likely that a combination of data and analysis from various perspectives will benefit an asset owner seeking to
incorporate ESG factors into its portfolios more so than adopting a single methodology. Ranking or analytics products
will benefit from cleaner and more accurate external data provision adopted by corporates entities. The value-add and
accuracy of these offerings is likely to increase over time.
In addition to the proliferation of portfolio analytics, asset owners can now access several digital selection tool platforms.
These services integrate ESG questions and questionnaires across all asset classes in addition to their core selection
functionality. The aim of these services is to allow asset owners to interact with managers and exchange data to more
efficiently perform traditional due diligence.
34
CREDITS
Authors:
■■ Tomi Nummela, Consultant, Mercer
(formerly Associate Director,
Investment Practices, PRI)
■■ Kris Douma, Director, Investment
Practices and Engagements, PRI
Editor:
Eliane Chavagnon
Design:
Alessandro Boaretto
35
The Principles for Responsible Investment (PRI)
The PRI works with its international network of signatories to put the six Principles
for Responsible Investment into practice. Its goals are to understand the investment
implications of environmental, social and governance (ESG) issues and to support
signatories in integrating these issues into investment and ownership decisions. The
PRI acts in the long-term interests of its signatories, of the financial markets and
economies in which they operate and ultimately of the environment and society as
a whole.
The six Principles for Responsible Investment are a voluntary and aspirational set of
investment principles that offer a menu of possible actions for incorporating ESG is-
sues into investment practice. The Principles were developed by investors, for inves-
tors. In implementing them, signatories contribute to developing a more sustainable
global financial system.
More information: www.unpri.org
The PRI is an investor initiative in partnership with

UNEP Finance Initiative and the UN Global Compact.
United Nations Environment Programme Finance Initiative (UNEP FI)
UNEP FI is a unique partnership between the United Nations Environment Programme

(UNEP) and the global financial sector. UNEP FI works closely with over 200
financial institutions that are signatories to the UNEP FI Statement on Sustainable
Development, and a range of partner organisations, to develop and promote linkages
between sustainability and financial performance. Through peer-to-peer networks,
research and training, UNEP FI carries out its mission to identify, promote, and realise
the adoption of best environmental and sustainability practice at all levels of financial
institution operations.
More information: www.unepfi.org
United Nations Global Compact
The United Nations Global Compact is a call to companies everywhere to align their
operations and strategies with ten universally accepted principles in the areas of hu-
man rights, labour, environment and anti-corruption, and to take action in support
of UN goals and issues embodied in the Sustainable Development Goals. The UN
Global Compact is a leadership platform for the development, implementation and
disclosure of responsible corporate practices. Launched in 2000, it is the largest cor-
porate sustainability initiative in the world, with more than 8,800 companies and
4,000 non-business signatories based in over 160 countries, and more than 80 Local
Networks.
More information: www.unglobalcompact.org

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ASSET OWNER MANAGER

PREAMBLE TO THE PRINCIPLES

This guide incorporates the expertise of individual PRI

■■ Christopher Ailman, Chief Investment Officer,

GAINING A HIGH-LEVEL VIEW OF PROSPECTIVE MANAGEMENT FIRMS 10

PORTFOLIO CONSTRUCTION AND INVESTMENT DECISION MAKING 16

ASSESSING ACTIVE OWNERSHIP THROUGH ENGAGEMENT AND VOTING 23

PRACTICAL TIPS FOR MAKING SELECTION DECISIONS 30

Selecting investment managers is more an art than a

Investment performance is the goal, yet it does not provide

I propose the four Ps: People, philosophy, process and price.

Most asset owners have very long-term liabilities and

To this end, the PRI has recently launched a series of guides,

Our latest guide, How to enhance manager relationships Kris Douma

Importantly, it does not provide a one-size-fits-all approach;

Ultimately, if asset owners want the financial markets to

INVESTMENT APPROACH Investment managers must ensure that investment

The process an investment manager uses to engage, as

Asset owners should ask for examples of how a manager’s

It is also important to find out whether engagements are

When engaging through service providers, asset owners

During the selection process, asset owners should

This chapter focuses on an investment manager’s culture,

Investment objectives usually differ across managers,

Questions to explore investment approach and

While short-term metrics may be relevant at times, short- ASSET CLASSES

The PRI’s asset class-specific guides is outlined below.

Managing Risks, Enhancing Returns (webinar)

■■ Impact Investing Market Map

Asset owners need to understand how investment managers

WARNING: Unmodified and superficial external ESG

Questions to explore governance and

■■ Please describe your organisational governance

Questions to explore investment decision making

Figure 4: Real world impact as a third dimension to risk/return considerations.

Same three investments,

Questions to explore thematic and screening

■■ Please describe how you monitor your investments

Asset owners that wish to include impact investments

■■ What tools or performance standards do you use to

ASSESSING ACTIVE OWNERSHIP

Collaborating with peers also facilitates the dissemination

Figure 5: An example of a common voting chain for a segregated account structure

VOTING PROCESS VOTING OUTCOMES

Questions to explore voting outcomes at the firm

Questions to explore securities lending and

■■ To what extent does your strategy allow for

The selection process should consider the ongoing reporting

Figure 6: General manager selection process model. Source: The PRI

QUANTITATIVE MANAGER SCREEN

Rank UK US Nordics France Germany Italy Netherlands Switzerland

2 Investment Investment Investment Financial Investment Financial Product Investment

3 Assistance Assistance Third-party

4 Integrity and Investment Investment Organisational

2 Cogent ReportsTM International Institutional Investor BrandscapeTM. August 2016

Dedicated Collaboration Use of External Dedicated

Engagement E,S,G + Strategic +++ Impact +++ Public Policy +

Proxy Voting Own Guidelines E,S,G + Active Voting Assurance +

Figure 10: Sample performance snapshot. Source: Wespath