Over the last year, there has been increasing attention paid to the implementation of responsible investment (RI) practices for both pension funds and fund managers. A number of reports, such as the first annual UN Principles for Responsible Investment review, have been published recently tracking the development of responsible investment practices and the integration of such practices into mainstream asset management investment processes. At the same time, some multinational companies and an increasing number of global asset owners, have become frustrated at the lack of transparency of external fund managers regarding their RI practices and the systems and processes underlying their actions with the companies they invest in. For companies this phenomenon is often referred to as “questionnaire fatigue”. They are approached by fund managers (and others), working it is assumed on behalf of the company shareholders, to increase their disclosure of, and to strengthen, their environmental, social and corporate governance (“ESG”) practices. An issue arising for many companies is that when this information isgathered and assessed (or rated) there is generally no discernable change in investment behaviour from their key shareholders. In some cases the asset managers are unknown to the companies and do not appear as significant shareholders on their registers.This background of interest and focus on ESG performance from investors has resulted in an ongoing debate between stakeholders on what the most appropriate standards of RI practice should be and how practically the application of such standards could be meaningfully assessed.
In judging the RI practices of fund managers, a starting point may reasonably be:
• A comparison with the company’s past practice and performance.
• A comparison with appropriate peer groups.
• The adherence to and explicit support of principles (e.g. PRI) and industry codes of conduct, and;
• The development of practices and conduct which meet the evolving expectations of global investors.
A significant amount of work has already been done by a
number of multi-stakeholder groups to identify RI good practice. However little work has been done regarding assessment models and the creation and provision of tools to measure implementation. Highly commendable work continues to be done within the UNPRI process and others. But we believe there is a place for an independent, credible and authoritative system to assess and benchmark manager RI performance that will add to and support this evolving debate.
As the focus on RI by asset owners continues to rise, fund managers face the challenge of how to incorporate ESG analysis into their existing investment management process, client reporting and the organisation’s governance. As recent reports have shown, some have made considerable progress towards meeting this challenge. Many, as yet, have not.
RI Metrics, a new organisation whose focus is the development of a range of RI related services has been working for the past 18 months with a number of leading European asset owners and managers with the objective of developing a model and methodology for evaluating RI best practice in mainstream asset managers.
In working with its stakeholders, RI Metrics have developed a best practice model which is based on the principles that a manager should have
• A developed and implemented strategy towards, and adequate resourcing of, RI issues within a fund manager’s organisational structure,• An effective process of investee company engagement which is orientated towards results rather than effort and provides for a better understanding of the risk and opportunity profile of investee companies,
• Clear integration between the work of the investment professionals and those directly involved in RI issues within a fund management organisation and that appropriate environmental, social and corporate governance research is made available to the investment professionals,
• A voting record which matches the fund manager’s declared policies, and
• Evidence that the fund manager applies the same standards of openness and transparency to itself as it expects from its investee companies.
Not all asset owners would weight such principles of equal importance. Many asset owners may only wish to see adequate practices in one or two of these areas to meet their specific needs, so flexibility and pragmatism is important in developing meaningful and useful outputs.
As RI Metrics assesses and scores fund mangers and makes this information available to asset owners, consultants and others, this comparative information on manager strengths and weaknesses should stimulate discussion amongst pension fund trustees and provide for some challenging questions being put to some of the world largest fund managers.
Will Oulton is co-founder of RI Metrics: firstname.lastname@example.org
RI Metrics site