The ESG-focused investment manager due diligence process

Posted by Andrew Borowiec on Feb 28, 2018 9:00:00 AM


ESG (Environmental, Sustainability, and Governance) has developed into a 70 trillion-dollar global investment class and as such the last few years have seen an increased emphasis on incorporating ESG specific elements into the investment manager due diligence process for this asset class.

Our panel of experts, comprising senior lawyers from the US and UK and a senior accounting firm specialist in the area discuss this in our IMDDA on-line workshop “Due Diligence on ESG”. Here are their top tips that you can apply to your own investment manager due diligence process:

1. Incorporating ESG into the due diligence questionnaire

In addition to your standard areas of exploration, an ESG specific investment requires ESG specific questions to be asked of the investment manager. Here are the essential you must ask and further explore as part of your investment manager due diligence process if satisfactory answers are not forthcoming:

  • Is there a meaningful ESG policy, containing specific language around obligations as opposed to an aspirational philosophy?
  • What seniority are the staff allocated to manage the ESG aspects of a portfolio? Are they senior and expert enough?
  • Does the investment manager adhere to the UN PRI protocols and how are these actioned/enforced?
  • What degree of commitment (spend) does the firm make to ensuring ESG objectives?
  • How do they conduct their management & oversight of 3rd parties’ adherence to ESG objectives?
  • With what frequency and in what depth do they review their own meeting of ESG objectives?
  • How are ESG risks identified and managed?
  • What ESG related metrics are measured, how are they reported and to whom?

2. Embedding ESG throughout the investment manager due diligence process

Due diligence relating to ESG objectives cannot be limited to the initial selection phase of an investment. If ESG objectives are stated as part of your firm’s overall strategy or as part of your portfolio, then consistent monitoring is essential Here are the key touch points for incorporating ESG into your investment manager due diligence process:

  • DDQ and subsequent investigations as outlined above
  • Inclusion of ESG specific metrics and commitments to ESG frameworks and standards included in PPM, side letters and/or LP agreement
  • Frequent and ongoing investment manager due diligence on ESG during the investment lifecycle
  • Closing measurement of the degree to which the ESG objective was achieved and where relevant redress sought in case of non-compliance with ESG objectives

3. Future proofing your investment manager due diligence process for ESG investments

Whilst hard and fast regulatory requirements are not yet a reality for ESG reporting and disclosure, they cannot be far away. In order to future proof your investment manager due diligence process for ESG investments, you should follow these steps:

  • Develop a system of measurement and comparison for your ESG objectives that will allow you to start to build historical data within your organization and bed in the habits of doing these activities, even if the detail of the process has to shift as requirements evolve.
  • In the same vein, go beyond regulatory requirements and try to develop a realistic, yet robust investment manager due diligence process for ESG investments that provides the best possible risk protection for your organization.
  • Finally, work with your Investment Managers to help them understand your requirements for ESG reporting and disclosure. Working in partnership with them and providing a “carrot” as well as a “stick” will ensure better outcomes all round.

To get more detail on this area and other critical ESG investment manager due diligence processes, listen to the rest of the webinar here:

View our Slides from our Due Diligence on ESG Webinar

Tags: Alternative Investments, ESG

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