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Cardano Risk Management

PRI reporting framework 2020

You are in Indirect – Manager Selection, Appointment and Monitoring » Selection

Selection

SAM 02. Selection processes (LE and FI)

02.1. Indicate what RI-related information your organisation typically covers in the majority of selection documentation for your external managers

Your organisation’s investment strategy and how ESG objectives relate to it

ESG incorporation requirements

ESG reporting requirements

Other

No RI information covered in the selection documentation

LE

FI - Corporate (non-financial)
Private equity
Property
Your organisation’s investment strategy and how ESG objectives relate to it
ESG incorporation requirements
ESG reporting requirements
Other
No RI information covered in the selection documentation

02.2. Explain how your organisation evaluates the investment manager’s ability to align between your investment strategy and their investment approach

Strategy

Assess the time horizon of the investment manager’s offering vs. your/beneficiaries’ requirements

Assess the quality of investment policy and its references to ESG

Assess the investment approach and how ESG objectives are implemented in the investment process

Review the manager’s firm-level vs. product-level approach to RI

Assess the ESG definitions to be used

Other

None of the above

LE

FI - Corporate (non-financial)
Private equity
Property
Assess the time horizon of the investment manager’s offering vs. your/beneficiaries’ requirements
Assess the quality of investment policy and its reference to ESG
Assess the investment approach and how ESG objectives are implemented in the investment process
Review the manager’s firm-level vs. product-level approach to RI
Assess the ESG definitions to be used
Other
None of the above

ESG people/oversight

Assess ESG expertise of investment teams

Review the oversight and responsibilities of ESG implementation

Review how ESG implementation is incentivised

Review the manager’s RI-promotion efforts and engagement with the industry

Other

None of the above

LE

FI - Corporate (non-financial)
Private equity
Property
Assess ESG expertise of investment teams
Review the oversight and responsibilities of ESG implementation
Review how is ESG implementation enforced /ensured
Review the manager’s RI-promotion efforts and engagement with the industry
Other
None of the above

Process/portfolio construction/investment valuation

Review the process for ensuring the quality of the ESG data used

Review and agree the use of ESG data in the investment decision making process

Review and agree the impact of ESG analysis on investment decisions

Review and agree ESG objectives (e.g. risk reduction, return seeking, real-world impact)

Review and agree manager’s ESG risk framework

Review and agree ESG risk limits at athe portfolio level (portfolio construction) and other ESG objectives

Review how ESG materiality is evaluated by the manager

Review process for defining and communicating on ESG incidents

Review and agree ESG reporting frequency and detail

Other, specify

None of the above

LE

FI - Corporate (non-financial)
Private equity
Property
Review the process for ensuring the quality of the ESG data used
Review and agree the use of ESG data in the investment decision making process
Review and agree the impact of ESG analysis on investment decisions
Review and agree ESG objectives (e.g. risk reduction, return seeking, real-world impact)
Review and agree manager’s ESG risk framework
Review and agree ESG risk limits at athe portfolio level (portfolio construction) and other ESG objectives
Review how ESG materiality is evaluated by the manager
Review process for defining and communicating on ESG incidents
Review and agree ESG reporting frequency and detail
Other, specify
None of the above

If you select any `Other` option(s), specify

See response in 01.2. We have not ticked "Review and agree ESG risk limits at the portfolio level (portfolio construction) and other ESG objectives" - this is because as previously flagged, we do not take an exclusion based approach to ESG integration. However, we expect all managers to be integrating ESG into their decision making where these factors have the potential to materially impact financial return. 

02.3. Indicate the selection process and its ESG/RI components

          See response to 01.2.

Note: we have not ticked the question "Review and agree ESG risk limits at the portfolio level (portfolio construction) and other ESG objectives". We do not take a limit based approach to ESG. Our approach to ESG is through Responsible Investment and taking a risk-based approach. We will push managers on whether ESG has been fully integrated into their investment decision making, including around portfolio construction. However, we do not enforce or expect specific limits to be adhered to pertaining to ESG parameters. 

Coverage teams are required to review all relevant information that can be used in assessing the ESG integration within the respect strategy. This will include all available documentation supplied by the manager to us or available online (through reporting standards bodies (e.g. UNPRI) or otherwise. 

In addition, a critical aspect of our approach is ensuring that the information and documentation reflects what is actually happening in investment processes within the particular strategy. We do this by speaking directly to risk-taking functions within the applicable strategy and requesting clear evidence that ESG integration is happening (e.g. recent case-studies or relevant positions within the current portfolio).
        

02.4. When selecting external managers does your organisation set any of the following:

ESG performance development targets

ESG score

ESG weight

Real economy influence

Other RI considerations

None of the above

LE

FI - Corporate (non-financial)
Private equity
Property
ESG performance development targets
ESG score
ESG weight
Real world economy targets
Other RI considerations
None of the above

You selected an `Other` option in table SAM 02.4 above, please specify

See response in 01.2 for full details of the ESG scoring methodology. 

Cardano will work with clients to establish how their investment principles can best be supported by incorporating ESG into our service offering.

As an investment adviser and manager to institutional clients, Cardano’s main focus is on achieving the optimal risk adjusted returns for our clients in line with the mandate provided, and as such, will not ordinarily make moral judgements on the day to day portfolio decisions of asset owners. 

Where clients have specific targets or goals in their investment principles, we will work with them to ensure that the manager exposure fully aligns with these principles. 

02.5. Describe how the ESG information reviewed and discussed affects the selection decision making process.[OPTIONAL]

          ESG information is considered and weighted as a core part of our manager selection process, across all asset classes. Critically, we do not silo out this assessment to a segregated team but ensure it is carried out by the team responsible for the investment. This ensures (i) robust, consistent and centralised oversight from our various investment committees (across strategies); (ii) integration - we view ESG risk as potentially having material financial impact on risk / return - as such, Environment, Social and Governance factors should be considered by the investment team as part of their overall risk-return assessment, alongside any other source of risk or return (outside of ESG).

Critical to ensuring consistency and redundancy is robust process and, while ESG factors are integrated into decision making throughout the process, we ensure investment decisions follow the below process: 

1.Coverage Teams are required to review RI / ESG policies, documentation and online materials for each manager, prior to investment   
2. Coverage Teams must send Cardano's bespoke, specific ESG questionnaire to each manager prior to approval for completion and these responses are reviewed by team responsible for the investment
3. Coverage Teams ensure that all managers have a form of on-site (physical, video conference or telephone) to discuss various risk-return drivers (including ESG). This will include identifying specific examples of where and how ESG factors can or have been incorporated into investment decision making around risk or potential returns. 
4. Each manager is assigned an ESG rating based on an evaluation of each of the above sources of information. The rating is structured, to seek constancy across portfolios.  

The lead analyst on a Coverage Team for the manager is responsible for integrating our view of a manager's ESG credentials when a proposal is made. This culminates in a dedicated ESG section in the investment proposal, itemising the ESG Rating and the rationale for that rating. This ensures accountability, constancy of process and robust debate as members of the investment committee will typically discuss / challenge / request more information around the rating. 
By taking this approach, we ensure that ESG is incorporated into the rest of the research considerations, rather than being thought of as something separate. Also, encouraging open challenge to views before investment is made in a manager, helps strengthen our robust ESG rating methodology.
        

SAM 03. Evaluating engagement and voting practices in manager selection (listed equity/fixed income)

03.1. Indicate how your organisation typically evaluates the manager’s active ownership practices in the majority of the manager selection process.

Engagement

Review the manager’s engagement policy 1

Review the manager’s engagement process (with examples and outcomes)

Ensure whether engagement outcomes feed back into the investment decision-making process

Other engagement issues in your selection process specify

LE

FI - Corporate (non-financial)
Review the manager’s engagement policy
Review the manager’s engagement process (with examples and outcomes)
Ensure whether engagement outcomes feed back into the investment decision-making process
Other engagement issues in your selection process specify

(Proxy) voting

Review the manager’s voting policy

Review the manager’s ability to align voting activities with clients’ specific voting policies

Review the manager’s process for informing clients about voting decisions

Ensure whether voting outcomes feed back into the investment decision-making process

Review the number of votes cast as a percentage of ballots/AGMs or holdings and available rationale

Other voting issues in your selection process; specify

LE

Review the manager’s voting policy
Review the manager’s ability to align voting activities with clients’ specific voting policies
Review the manager’s process for informing clients about voting decisions
Ensure whether voting outcomes feed back into the investment decision-making process
Review the number of votes cast as a percentage of ballots/AGMs or holdings and available rationale
Other active ownership voting issues in your selection process; specify

03.2. Describe how you assess if the manager’s engagement approach is effective.

03.3. Describe how you assess if the manager’s voting approach is effective/appropriate

03.4. Additional information [OPTIONAL]

          Coverage Teams in respect of each invested manager are responsible for rating each invested strategy. The overall rating is calculated by aggregating scores across four specifically assessed categories; one of those categories is Engagement, voting & stewardship. 

As part of this, Coverage Teams will review data (supplied as part of the annual information submission) on how manager's have voted (where they are able to) and the proportion of instances managers voted for Management, against Management or abstained. 

Where a manager has abnormal voting patterns, we will engage with the manager to ensure their processes and procedures adequately take into account Stewardship and the UNPRI principals around voting and engagement. This includes understanding how managers exercise their votes (directly or through a proxy service provider) and, if through a service provider, what level of service have they opted for and how this is level is monitored and chosen.  

While we track the above, we also acknowledge that attributing value / impact to specific voting and engagement practices is extremely difficult. We have not yet built out a methodology to accurately track and assess this. For now, we are focused on ensuring that the managers themselves are indeed considering ESG with respect to engagement and voting (where applicable to the specific strategy). Note - our approach is one of Responsible Investment. 

In addition to the above, we also track our engagement with managers (and report on this to clients). We seek to quantify this impact by registering the changes that managers have / are about to make to their policies or practices, as a direct result of our education and engagement efforts.
        

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