In its Securities Markets Risk Outlook Report 2021 and all recent communications, the Central Bank of Ireland has held firm on what it expects of those providing “sustainable product offerings” – that they deliver in terms of meeting required standards, clearly explain the features of their funds and properly prepare themselves for the “transition to a greener securities market”.
But what does this actually mean for those responsible for the governance of sustainable products and what can they do to ensure they are not at risk of “greenwashing”? Viewing ESG through the lens of the fund board (particularly the independent non-executive director), I believe that half the battle is understanding what you need to know and identifying what are the right questions for you to ask. Sounds simple enough you would think, but not always – there is such a myriad of issues, approaches and terminology to navigate in the ESG arena that can make it difficult to break down.
That is why I have compiled a list of questions for independent fund directors to use as a checklist for being on top of their ESG related duties. Granted, it’s quite a lot of questions, hardly to be dealt with in one sitting. Even at that it’s not an exhaustive list, but I hope it serves as a useful reference and a good place to start. Note: the questions below reflect my own beliefs of what’s relevant to ask, based on knowledge and experience in evaluating funds (as an independent consultant) but also from years of promoting asset managers’ responsible investment funds to investors. I have also taken on board suggestions from a number of sustainability experts, asset managers, fund service providers and other fund iNEDs. Many thanks to those of you who may spot some of your questions – under the following headings – below!
- ESG Skills – The Board
- ESG Philosophy & Approach
- Implementation & Measurement
- ESG Affiliations & Collaborations
- Regulatory Disclosure & Reputation
- Setting Expectations
- Governance & Strategic Mindset
ESG Skills – The Board
1. How knowledgeable are you and the board generally on ESG issues and their ongoing developments? Are you in a strong position to stay up to date with new developments, not just regulatory, but the broader trends?
2. Do you believe there is an ESG knowledge / skills gap on the board? If so, how is the board planning to fill the gap – training, induction, regular updates / briefings from the fund managers?
Fund’s ESG Philosophy & Approach
1. How well do you understand and how comfortable are you with the fund’s/firm’s ESG philosophy and strategy? Is it clear to you how ESG is integrated within the fund’s investment process (a) overall and (b) for each asset class?
2. Do you know the origins of the thinking that led to the chosen ESG approach?
3. Do you understand the ESG approach adopted by the fund / firm versus the other possible approaches in the marketplace, i.e. exclusion approach, best-in-class, impact investment etc? Materiality within the ESG factors?
4. Have you a clear understanding of the degree to which ESG factors are regarded as a risk management versus value creating component of managing the fund? Has the board identified and is it mitigating the main ESG risks while also optimising the ESG opportunities for the fund?
5. Has the fund manager walked the board through the application of ESG in making investment decisions? i.e. citing examples of contentious decisions which led to a stock being held or sold, examples of where a stock fell short of ESG criteria (and why) but then improved its ESG score (how) and became eligible for inclusion.
Implementation & Measurement of ESG
1. Is it clear who is accountable for implementing ESG and what is the line of command? Are you satisfied it is being implemented and overseen at a sufficiently senior level? Do you know the ESG credentials of the ESG personnel?
2. ESG will influence the long-term strategic decisions of the fund manager and therefore affect the fund. Do you know how well resourced the manager / fund is now and down the line to meet their obligations for regulatory disclosures, increased corporate engagement, increased ESG communications to investors etc?
3. Are you satisfied you are receiving the appropriate information / metrics to clearly understand the ESG characteristics of the fund? (this will vary depending on multi-asset, single asset, thematic fund, active, passive, ETF etc)
4. Do you understand the fund’s ESG Ratings system? – inhouse ratings (subjective), third party scores (objective) or a blend? Do you know the various providers, why chosen, key differences between them?
5. Where fund managers engage with investee companies on ESG issues, is the process clear and well monitored? i.e. has it been explained on what grounds, who contacts the company, through what medium, tracking progress, follow-up process etc?6. Do you understand and receive detail of the Proxy Voting system for Investors – is it carried out by the fund manager or outsourced? If latter, which service provider, why chosen? Logging and reporting of votes and outcomes, comparison with competitors etc – is this reported to the board?
7. What are the key concerns / risks around securing the relevant ESG data? Any issues around reliability? Where a fund of funds is involved or investment is passive (indexed) versus active are there further complexities with the data and ratings? i.e. variation in ESG approach and scores among the underlying funds, adjustments to indices etc – how do these align with your overall fund objectives?
ESG Affiliations & Collaborations
1. Do you know to what initiatives / partnerships the fund / its managers have signed up, i.e. UN PRI, CDP, Climate Action 100+?
2. Do you understand the purpose of each entity, the role played by the fund / manager within it (just a signatory or more?) and the implications of being involved, scores awarded? i.e. if signed up to a Net ZERO Asset Management, what path will the fund take, will the chosen path change permitted fund holdings, over what timeframe etc?
3. Are there plans to join other collaborations, pledges etc? If so, for what reason and what is entailed?
Regulatory Disclosures & Reputation*
1. Are you satisfied the fund / manager is compliant on regulatory disclosures to date? Is it well prepared for the next stage in regulatory disclosures – any gaps to be addressed, and how are these being addressed?
2. How assured are you of the fund living up to claims of being green, sustainable etc and matching the SFDR categorisation determined for it on 10 March?
3. Are you comfortable the fund’s marketing messages and regulatory disclosures re ESG are accurate / not misleading (just as you would want to satisfy yourself that other investment style characteristics – e.g. growth, value bias etc of the fund have been accurately explained)?
4. Are we promoting honesty and trust in what the fund does / doesn’t do in ESG terms, with clear, consistent disclosures – is the fund / manager delivering?
5. In so far as they are available, are we referring to any external reporting standards bodies, i.e. SASB etc?
(*For the purposes of this article, I have created broad questions above regarding regulation and disclosure. In reality of course, a whole other layer of drilling down specifically into SFDR, the EU Taxonomy and other upcoming compliance considerations could also be needed).
Setting Expectations
1. Have we agreed or are we working on clear information / reporting requirements with management (format for board reporting, content frequency), accepting it will be a work-inprogress, perhaps less granular initially than in the longer term?
2. Do we have ESG as an ongoing board agenda item (e.g. on a par with discussing investment performance?) Have we decided how ESG / Sustainability should be covered at board meetings – as a standalone reporting item? Or as subset items within for example the investment report, risk management report?
The “G” in ESG – Governance & Strategic Mindset
1. Given the good governance expected from investee companies, is our fund board modelling what good looks like – addressing independence of board / chairs, board tenure, diversity (gender, age, ethnic, skills, experience)?
2. Is the focus of our strategy around ESG etc to satisfactorily comply with the regulatory requirements or do we want to be more and lead in the field of responsible investing?
Hopefully, many of these questions are already being addressed and the relevant conversations taking place across fund boards today. We are hearing it everywhere – ESG is here to stay – and we are all (quite rightly) expected to raise our game. In the continually evolving, non-uniform, ESG landscape, it will be no mean feat to extract quality, authentic information. However, this will be key to wiping out greenwashing and ensuring good governance. And securing that information can start with just a question.
About the Author:
Aedín O’Leary is an Independent Director and Investment Consultant with over 25 years’ experience in the asset management industry, spanning multiple asset classes (traditional and alternative) and differing mandates. She consults on Asset Manager Selection (particular focus on ESG) and on Strategy for Investment Firms in relation to Launch and Distribution of Funds.
Aedín is a member of the Ethical Advisory Group for Appian Asset Management and of the ESG Working Group at the Investment Fund Directors Association. She is also Co-Founder of the Green Team Network, an initiative which devises collaborative solutions for the Irish Funds industry to tackle Sustainability (https://www.greenteamnetwork.ie/about). She also has substantial engagement with the Not-for-Profit sector with particular focus on Governance, Regulation and Risk.