This is the first of a two-part series. The second part, to be released tomorrow, looks at areas of improvement, the voluntary disclosure question and third-party assurance.
As the 2019 PRI assessment cycle concludes, signatories awarded top-tier scores have wasted no time announcing the good news – with some even sharing their submissions in the name of transparency.
Yet the market knows relatively little about how high-scoring asset managers approach the assessments internally. RI spoke to a diverse group of A+ rated managers and a consultant who advises them to get a sense of industry best practice.
This is our second reporting project looking at the PRI assessment process and follows the #knowthePRIscore series last year.
We would like to thank: Asha Mehta, Director of Responsible Investing at quant manager Acadian Asset Management (AAM); Eoin Fahey, Head of Responsible Investment at impact specialists KBI Global Investors (KBI); Jonathan Bailey, Head of ESG Investing at independent manager Neuberger Berman (NB); Joshua Kendall, ESG head at institutional specialists Insight Investment (II) and Rory Sullivan, founder of ESG consultancy Chronos Sustainability (CS).
1) Can you describe the organisational resources allocated to completing the PRI assessment?
AAM: The Director of RI will steward the assessment documents through to completion and will bring in the correct research analyst or portfolio manager depending on the question. We will also work with information that we have developed for external audiences on our marketing or strategy side.
KBI: The Head of Responsible Investment is assisted by a colleague from the RI team and other colleagues may be roped in but very minimally, perhaps to verify some facts or figures.
NB: There are about 30 to 40 people who contribute to the assessment which include our RFP team, legal and compliance and internal audit. The bulk of the content comes from our frontline equity and credit analysts, private equity professionals and portfolio managers. This is because we want the voice of our investment professionals, who consider ESG day in and day out, to be heard. It also helps that they understand the emerging ESG issues which means that as a firm collectively we are getting smarter.
CS: There are two distinct client requests which vary depending on where they are on their ESG journey. For those just starting out, they tend to see the assessment from a compliance perspective and want to complete the assessment and get the best possible grade. The clients which tend to use our services are more sophisticated managers who want to extract more strategic value from the assessment. One of my clients from the most recent cycle, [UK charity specialist] CCLA are a good example. They have been consistently highly rated – getting an A+ in 2018 – but wanted an extra set of eyes to identify areas for internal improvement.2) How long does it take to complete the PRI assessment?
II: This year our RFP specialist and the ESG head went through the questions one by one as we made an error in last year’s submission which resulted in a downgrade to A. We probably had three meetings on the assessment. The first was the most intensive, then we reviewed and made changes, and then a final review. The whole process takes maybe three to four weeks. We only answer fixed income questions so if you are multi-asset manager the process could be a lot more challenging.
AAM: As long-time signatories, we know the rough structure of the assessment and we have some existing content which we can use to populate the data, but the survey changes ever so slightly every year, to the order of 10-20%, and that can be fairly meaningful. We leave a month to six weeks to complete the assessment.
“We have made major changes to our processes as a result of the assessment”
KBI: Two to four weeks but now of course we have done this in several previous years and a lot of the content doesn’t change. It would be a lot more time intensive if we hadn’t.
NB: The process kicks off in January and in theory everything is supposed to be written by the end of the first week of March, so that is around two months. Then we use the two or three weeks before submission to go through audits, the various sign-offs and all the rest of it.
3) Is there any senior management involvement in the PRI assessment?
II: With so many RFPs coming through here, ESG in particular, there are no compliance sign-offs. And because the PRI assessment is a voluntary survey, it doesn’t need additional sign-offs once approved by the ESG head.
AAM: We have a Responsible Investing Committee made up of our co-CEOs, CIO, office heads and they will be informed of the conclusions that we report in the assessment so that there are no surprises. Our CIO and Chief Compliance Officer signs off on the document.
KBI: We have a rigorous sign-off process. Both our CIO and Chief Compliance Officer, who is a board member, review our submission in detail and we go through two or three drafts. Finally, it’s signed off by our Responsible Investing Committee, Executive Committee and finally by each individual Board member. Very few documents have that level of governance.
4) What is the strategic value of the PRI assessment to your organisation?
II: If the PRI are going down a specific path you start to examine your own processes to see if you come up short. One of the things we’ve wanted to do for a long time is a carbon assessment of our fixed income book, which is about $80-90bn, to evaluate its resilience in difference climate scenarios.
Now that the PRI is asking whether signatories are doing any sort of testing or modelling for climate risks, we are now thinking about how we can do this sooner rather than later.
AAM: The assessment is a helpful framework for organising our various ESG initiatives as they give a sense where the market is heading. One of the ways we have pushed the envelope as a quant manager is by adopting active ownership processes, particularly engagement, which we did in part because active ownership was a core focus of the assessment five or six years ago. This was a challenging exercise as quants often hold hundreds or even thousands of securities and have much different holding periods.
KBI: We have made major changes to our processes as a result of the assessment, especially when we have no good answers to the questions. As an example, we changed our policies on securities lending where in the past, we did not ever vote on stock which was out on loan. Our portfolio managers are now notified of proxy votes coming up which allows them to recall stocks so that they can vote on important or contentious issues, or choose not to do so for routine AGM matters.NB: Once we receive our assessment report, we will take a step back and prioritise process improvements over the next year. Obviously, we hope that will overlap with PRI priorities and will be ultimately reflected in the assessment documentation nine or 12 months later. Some time ago, the PRI had signalled that they would introduce a climate module and so we have been investing and enhancing our climate risk analysis capabilities ever since. We even wrote our firm-wide climate strategy with the PRI assessment in mind so that we weren’t starting from scratch during the reporting process. Going forward, the PRI have signalled that they will be focusing on impact, mapped to the SDGs for example, so we are working on that.
5) What are the strengths of the PRI assessment?
All respondents suggested that the biggest strength of the assessment is its flexibility which allow managers to implement ESG in a way that makes sense for their investment process. Respondents also said that the assessments are useful as an indicator of the market’s direction of travel for ESG which guides process improvement internally.