Investment Mandates in an ESG Context

Arun Kelshiker

20 years: Asset management and stewardship

In this video, Arun dives into the world of ESG investments, discovers the significance of fiduciary duty, tools like RFPs and SIPs for clarifying client needs, and the importance of tailoring ESG strategies. He further explores effective fund monitoring techniques and the challenges of measuring ESG performance.

Sector and Region Transition

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Investment Mandates in an ESG Context

18 mins 25 secs

Key learning objectives:

Understand the importance of fiduciary duty and the nuances of alignment and accountability between investors and their clients to create effective client mandates
Outline the significance of the Request for Proposal (RFP) process and the Statement of Investment Principles (SIP) to clarify client objectives and guide investment decision-making
Outline how ESG considerations and strategies vary based on the differing needs of various clients
Understand how to monitor and evaluate ESG funds while being aware of potential greenwashing risks

Overview:

Investment professionals are tasked with aligning decisions to client objectives, often outlined through the Request for Proposal (RFP) process. With the increase in interest surrounding environment, social, and governance (ESG) strategies, it's essential to create approaches that cater specifically to various clients, such as pension funds and individual investors. Embedding ESG considerations into investment mandates is paramount, with frameworks like the UK's Stewardship Code providing a structured oversight. A nuanced understanding of classifications and ratings, especially the EU’s SFDR, is key to informed investment. Moreover, it's crucial to counteract greenwashing, where investments are misleadingly portrayed as eco-friendly, to maintain true ESG transparency.

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Summary

Why is the concept of fiduciary duty important when it comes to alignment and accountability with investors and their clients?

Fiduciary duty is pivotal because it embodies the responsibility investors have to act in their clients' best interests. It ensures a trusted relationship where the investor is committed to making decisions that prioritise the client's financial well-being. This duty enforces a high level of transparency and accountability, necessitating that all actions and decisions align with the client's objectives and risk tolerance, ultimately fostering trust and ensuring that the client's assets are managed with the utmost care and diligence.

How does an investor go about clarifying client needs and objectives?

To clarify client needs and objectives, an investor often employs tools like the Request for Proposal (RFP) process and the Statement of Investment Principles (SIP). These tools provide a structured format for clients to articulate their investment goals, risk tolerance, time horizon, and other preferences. Through RFPs and SIPs, investors can garner a deeper understanding of what the client seeks to achieve, ensuring the chosen investment strategies and allocations align with those aspirations.

Why does ESG need to be tailored for different clients?

ESG (Environmental, Social, and Governance) needs customisation because clients have diverse objectives and motivations. For instance, an institutional pension fund might prioritise long-term stability and have different ethical concerns compared to a sovereign wealth investor or a retail investor. Tailoring ESG strategies ensures that each client's unique financial and ethical considerations are addressed, optimising the alignment between ESG integration and the client's specific goals.

How should funds be monitored and evaluated?

Monitoring and evaluating funds requires a varied approach. To ensure genuine ESG integration, one should employ ratings, classifications, and due diligence processes. These tools provide insights into a fund's adherence to stated ESG principles, its performance, and potential risks. Regular evaluations, benchmark comparisons, and detailed analyses ensure that funds consistently meet their outlined objectives and are aligned with the client's expectations.

What are the challenges in measuring and reporting ESG-related investment performance?

Measuring and reporting ESG-related investment performance can be complex due to several challenges. One significant issue is the potential for "greenwashing," where funds might appear more environmentally or ethically responsible than they truly are. Additionally, there's a lack of standardised ESG metrics and reporting practices, leading to inconsistencies across the industry. This variation can make comparisons and evaluations difficult, as different funds might prioritise or interpret ESG criteria differently. Furthermore, striking a balance between financial returns and ESG outcomes can sometimes present challenges in performance assessments.

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Arun Kelshiker

Arun Kelshiker was formerly the Head of Asset Allocation and Portfolio Strategy at Standard Chartered Bank and part of the bank's Global Investment Committee, where he provided investment advisory and multi-asset portfolio solutions. His focus is now with Cambridge Sustainable Investment Partners, which draws its expertise from the Resilience and Sustainable Development Centre at Cambridge University. He is also a university lecturer at the Frankfurt School of Finance and Management and is Vice Chair of the CFA UK's Inclusion and Diversity Committee and its Investment Committee.

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