European Equity, ESG Focus

Client-Specific Concerns

Strict ESG requirements were of crucial importance. The investor sought a manager that: has personnel dedicated to ESG research; could demonstrate clear integration of ESG within their investment strategy; actively engaged with companies on ESG issues; and would be able to comply with a qualitative ESG policy. Other key preferences included: a benchmark-agnostic mindset (i.e. constructing a portfolio without reference to benchmark weights); “non-traditional” fee structure; track records of more than three years; and at least USD 20 billion in firm AUM.

Outcome

• Clearly defined ESG requirements.The investor had developed very clearly defined views regarding ESG through its experiences with a variety of asset managers. Generic ESG assessments based on non-customised criteria are increasingly inappropriate for clients. This investor had developed a set of ESG-related investment guidelines, with a subjective approach that afforded managers the flexibility to apply the criteria on a ‘comply or explain’ basis. Manager’s willingness to work with a descriptive policy is good news for asset owners, eliminating the burden of having to maintain a stock exclusion list.
• Relatively limited ESG integration from quantitative managers.To date, ESG has not been statistically proven as an “alpha factor”, so managers with a quantitative investment process typically do not consider it or will use it as a “risk factor” in portfolio construction. In addition, quantitative managers generally do not conduct fundamental research on companies (ESG-related or otherwise) and rarely have a need to actively engage with companies. We find such managers being less preferable for investors with a strong ESG emphasis.
• Support with innovative fee arrangements. Managers were encouraged to provide non-standard fee proposals – the investor would not accept an ad valorem basis points fee. The most common solution was a fixed cash fee paid each year, irrespective of mandate size, providing cost certainty to the investor and revenue certainty to the manager. While this relatively unique requirement was new to most asset managers, and was initially met with some hesitation, as the manager search progressed we saw them become amenable to the structure. Investors should not be afraid to think creatively when it comes to fee structuring.