Fund management mandates should include ESG criteria

24 March 2016

Editor

EU regulation

The United Nations-supported Principles for Responsible Investment (PRI) initiative has launched a report, How Asset Owners Can Drive Responsible Investment: Beliefs, Strategy and Mandates, calling on asset owners to do more to reflect ESG risks and opportunities in their investment beliefs and mandates.

The report, states that although many asset owners have made commitments to responsible investment, the majority have yet to ensure that these are effectively implemented. There are inconsistencies in investment practices in different asset classes, high-level statements on sustainability or ESG issues are often missing from investment beliefs, and responsible investment commitments are not embedded in investment mandates.

The conclusions have been reached by the PRI following interviews with over 160 asset owners, investment managers, investment consultants, legal advisers, companies, public policy makers and civil society organisations and analysis of the reporting data provided by PRI signatories, published annually in the PRI’s Report on Progress. The PRI hopes to send a message to leading investment managers, and other service providers, that they are pushing hard to create markets in responsible investment and to provide a clear sign to key stakeholders that the PRI is advocating for an aligned vision of ESG considerations between asset owners and fund managers.

PRI's analysis found that mandates for fund managers are an ‘end-point’, as responsible investment mandates start by first developing beliefs and governance. The report states that sustainability considerations are often missing from asset owners’ investment processes, in particular from the selection, appointment and monitoring of investment consultants and investment managers. The report provides suggestions of the types of clauses around ESG considerations that asset owners can include in their mandates to fund managers. The report makes a case for the need for asset owners to do much more to support a sustainable financial system, as asset owner implementation of responsible investment has a multiplier effect through the investment chain.

The PRI provides solutions to the barriers asset owners face when implementing responsible investment  Asset owners beginning responsible investment activities and looking to ensure that ESG issues are integrated into their investment practices and processes need to build their own internal evidence base, the PRI said. As ESG issues are analysed and taken into account, asset owners can gather evidence on whether and how this integration contributes to investment performance, the report suggested.

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