As we are an investment manager ourselves, we have a very small allocation to external managers (<10% AUM). All of our external managers are PRI Signatories and consistent with PRI Principle 1 they incorporate ESG issues into investment analysis and decision-making processes.
Responsible investment considerations are included in Pendal's investment manager selection, appointment and monitoring as outlined in our "Investment Manager Due Diligence Guidelines".
Investment due diligence oversight is done by the Investment Boutique and operational due diligence oversight is done by Investment Operations, although both are conducted in consultation with area experts, such as Risk and Compliance, Responsible Investments, Operations and IT.
The due diligence process can involve a combination of site visits (recommended for all new appointments) and/or video/audio conference meetings for annual monitoring purposes, together with desktop reviews. Where relevant, desktop reviews include detailed questionnaires on ESG-related areas (such as investment philosophy, governance structures, strategies, investment approach, engagement and proxy voting practices), risk management framework and reporting. Such reviews are in addition to reviews of manager performance reports, policies and procedures, as well as manager presentations, conference calls and use of external consultants.
We also require our external managers to complete an annual ESG Due Diligence Questionnaire. The latest questionnaire covered areas such as:
- Updates on governance structure, roles and responsibilities for ESG policy development and implementation.
- ESG reporting / transparency initiatives.
- ESG integration related data sources and research inputs.
- ESG risk management framework - tools, review cycle, oversight and responsibilities - in particular climate-related risk management framework, tools and client reporting.
- The organisation's latest PRI Transparency and Assessment Reports
- Active Ownership practices - engagement and proxy voting policies, case studies, statistics and related client disclosures.
- Any enhancements / changes to RI related investment processes or policies.
- The Sustainable Development Goals (SDGs) and whether their organisation is developing investment strategies or broader initiatives aligned with the SDGs.
- Impact investing, in particular whether their organisation is involved in impact investing solutions with reference to asset classes and jurisdiction.
Managers have responded in detail with supporting material provided in most cases to reinforce their responses (in particular on ESG risk management frameworks, climate-related reporting and active ownership practices.
For our external managers implementing additional ESG strategies, such as Ethical (negative) and Best of Sector screening we conduct a more ESG-focused due diligence process, which includes requesting additional ESG information and reporting requirements to those outlined above.
The only externally managed asset class where we do not integrate ESG factors into investment decisions is hedge funds.
The majority of our hedge funds investments are quantitatively based. To incorporate a new factor into a quantitative investment process requires a sufficient back history of objective data with availability on an 'as released' basis to avoid 'look back bias', as well as for the insights from this data to be proven to add value when tested in a statistically rigorous fashion. ESG has not yet reached the point where this is able to be done, however we expect that as more data history becomes available this could change. Furthermore, our hedge fund investments frequently employ trading strategies that are more short term in nature. Most ESG risks are expected to manifest over much longer horizons. This makes incorporation of ESG factors less relevant in this asset class.