US$12 trillion ICGN to ratify ‘long-term/sustainable’ model mandate for client/manager contracts

Risk management, ESG, fees and market stability included in outline RFP requirements.

One of the world’s largest investor lobby groups representing institutional assets of US$12 trillion will next week vote to ratify a set of model investment mandate terms that could cement long-termism, ESG requirements and ‘systemic responsibility’ into the contracts between some of the world’s largest asset owners and managers. At its annual conference in Paris, which kicks off on September 12, the 550+ members of the International Corporate Governance Network (ICGN), will debate the final draft of a series of investor mandate recommendations on risk management, asset management fees and pay structures, integration of ESG factors, stewardship and voting, and commission payments. If passed – as expected – members of the ICGN, which include many of the world’s biggest pension funds, would then be expected to include variations on the model clauses in their investment contracts. The mandate recommendations, which have already been through the ICGN’s consultation process, are broken down into topics. One major position regards fund manager governance. It recommends that asset owners seek assurance on the independent oversight of managers as well as the effectiveness of their board and governance structures to hold management to account and ensure risk management and performance are aligned with clients.More specifically, on risk management, it prompts asset managers to report on the breadth of the risks in their portfolios and their management. In a response to the financial crisis, the model says managers should also have a policy of ‘systemic responsibility’ with disclosure for overall market stability as well as for specific asset classes. It says: “We suggest that any material written representations about risk management capabilities and practices that are presented during the marketing and due diligence process be attached to and incorporated into the management contract.” On mandating ESG factors, the ICGN says the knock-on effects of better company executive remuneration plans, enforcement of integrity standards for company behaviour or financial reporting can influence long-term, risk-adjusted returns at the asset, portfolio and financial system levels. Consequently, it says ESG factors should be measured, monitored and reporting on by fund managers to a level that asset owners can carry out a proper due diligence review. Regarding so-called ‘stewardship responsibilities’, the ICGN says contracts should clarify ownership and voting rights and powers between fund manager and client, with full control being possible for the latter. It also calls for clarity on the visibility of the level of stock lending and any lent positions at a given time, as well as the terms on which securities can be recalled for voting.

Asset manager fees and remuneration of individual fund managers should be clearly aligned with those of the client, while turnover of companies in investment portfolios should follow an expected range (subject to a periodic review) and require disclosure and explanation if exceeded. The recommendations also stress that clients should receive reports on any change in a manager’s governance, portfolio manager remuneration, investment approach, risk appetite, sales by key staff of holdings in the fund or the manager, or regulatory investigations or legal proceedings taken against it. Management accounts or financial statements should also be shared regularly with clients.Finally, the mandate terms stress that commission payments such as investment research and voting should reflect an appropriate balance between short- and long-term client interests and be transparent. It adds similar terms for counterparty risk. The ICGN says its model mandate terms should be seen as complimentary to existing guidelines such as the UN Principles for Responsible Investment and others specific to particular asset classes such Institutional Limited Partners Association Principles and the Hedge Fund Standards Board Standards.
Link to ICGN conference