Figuring out whether your money is funding issuers that are effective stewards of their corporations, society and the environment starts with asking your asset managers pointed questions about how they incorporate environmental, social and governance (ESG) concerns into their processes.
Based on the inquiries we’re receiving, institutions across the globe have shown a growing interest in learning more about the details of management firms’ investment processes and evolving ESG priorities, beyond just their written ESG policies.
Here are some of the most thought-provoking questions we’ve seen recently from clients.*
1. Have you trimmed, sold out of or increased your exposure to an asset due to ESG considerations? Which ones?
Talking about ESG is one thing; acting upon it is another. Clients want to know when their manager has made changes to their portfolio based on ESG concerns.
2. How would portfolio allocations have differed over the past year if ESG hadn’t been factored into the investment decision-making process?
Clients want a detailed assessment of how their investment manager balances ESG concerns and alpha generation. Comparing existing portfolios to those in a world without ESG is a helpful litmus test.
3. List the five securities in your strategy that score the lowest on ESG metrics. What’s the rationale for including these securities?
Even in a portfolio that takes ESG concerns very seriously, there are always entities that rate higher than others on sustainability measures. Asking about the lowest-rated investments is a quick way to zero in on the most potentially vulnerable parts of a portfolio or strategy.
4. What are some examples of your engagement with companies on ESG issues over the past year? Please outline the issue and what you hoped to achieve, whom you spoke to, how many meetings you had and the outcome.
Choosing which assets to buy and sell is only one part of responsible investing. Active managers can often spot problematic practices before they’re widely recognized, and clients want to know how they engage with management teams to address these concerns.
5. Do you have a specific exclusion policy toward controversial weapons?
Some issues are so important to clients that they want to know whether a manager has excluded certain types of investments from their portfolios entirely, such as companies that manufacture controversial weapons, including nuclear weapons, land mines and chemical weapons.
6. Do you assess the fund’s exposure to climate risk? Do you measure and monitor the carbon emissions of the investments in the portfolio?
Investors are asking very detailed questions about exactly how managers evaluate and monitor the environmental track records of the entities they invest in, including the amount of carbon emissions of portfolio investments.
7. What ESG training do you provide to your employees?
It can be hard to determine from the outside how much an investment manager values ESG. Ensuring that all employees of the management firm receive some training in the ESG principles that align with the firm’s corporate mission is one way to ensure that a manager “walks the talk.”
8. Which senior leaders oversee your ESG policy—the CEO? The CIO? The portfolio managers?
Some clients check to make sure that ESG is embedded not only in a manager’s investment process, but also in the very structure of the organization. In other words, is ESG truly a priority for the entire firm?
9. Do ESG considerations form part of the appraisal and compensation plan for key staff?
“You are what you measure,” as the saying goes. Clients want to know how an asset manager’s employees are incentivized to ensure that ESG is more than just window dressing.
*Some questions have been edited and condensed for grammar and readability. Some similar questions from different investors have been combined into one question.