When conducting due diligence, as a starting point, it makes sense to ask for examples on what managers did or did not allow into their portfolios, and why, and this should facilitate a basic understanding of their process, how it works, and how well-versed and comfortable they are speaking about the issues.
Importantly, transparency is key, because if there is significant embellishing language around ESG or RI, but there are no concrete examples, or no reporting the manager can disclose, that would be a red flag for greenwashing. In recent years, there has been more focus than ever on the environmental piece of the equation, particularly climate change. There are many ways managers can incorporate climate change risks into their investment processes, ranging from investing in companies making a positive contribution to a low carbon future to excluding laggard companies or high-risk sectors and pushing for meaningful change through engagement and proxy voting. Therefore, consider digging deeper, and asking a manager: how are you actually voting on climate-related shareholder proposals of the companies that you hold? If the voting is consistently against propositions to enhance climate change reporting, then that is a warning sign. The right to vote is a key part of equity ownership, and an opportunity to influence change.
Similarly, if there is no ESG expertise or responsibility at the manager level, either within the portfolio management team, or the research analyst side, that is another point of concern. Can they provide any thought leadership pieces on the topic? Finally, are there any standards to which they’re adhering to provide external accountability? For example, one would expect that any manager claiming to be a responsible investor would be a signatory to the internationally-recognized UN Principles for Responsible Investment (PRI), or other corporate governance and stewardship codes.
To make the process more effective – and efficient – for institutional investors, I’ve included some sample questions that can be used to assess the quality and depth of managers’ ESG integration approach, which can also be found here:
Investment policy and firm structure:
- Which person/team/committee is responsible for implementing an RI program, and who is responsible for ESG analysis within the investment process?
- Does your organization have a dedicated ESG team or one responsible for ESG integration?
- What are some specific examples of how ESG factors are incorporated into your investment analysis and decision-making process?
- What ESG data, research, resources, tools and practices do you use to integrate ESG factors?
- How do your active ownership practices impact investment decisions?
- What are some specific examples of your voting and engagement activities?
- How often and how will you report on ESG and active ownership activities?
- How do you communicate your ESG performance to stakeholders?
Source: Selecting Managers, Principles for Responsible Investment.