Q: Ratings aside, do you have expectations for your sub-advisors?
A: Yes, we do. Among the core pillars of our investment process, is to have a well-defined ESG philosophy and governance framework, which recognizes the potential impact that ESG factors can have on individual securities and overall portfolio outcomes.
We also look for a formal and effective governance framework around proxy voting and engagement, including ESG considerations. This in the context of supporting overall investment objectives of respective portfolios. And we value adoption of normative codes, such as PRI, which can help support alignment, transparency and the ongoing evolution of activities around ESG.
We have encouraged our sub-advisors to become signatories to PRI, and expect the last one to do so early this year. And, at this point, all our equity subadvisors have ESG and proxy voting policies in place and we monitor and encourage ongoing evolution. As part of this, we look beyond top down, firm-wide ESG initiatives and marketing – putting emphasis on consistent implementation of ESG policies in day-to-day investment decisions.
This last point is really important. In fact, through our research across investment managers globally, we’ve found that the link between a firm’s objectives and portfolio level activities is not always as strong as perhaps we’d like to see. So we often probe individual investment decisions to reinforce that point.
Q: How does ESG apply to your investment process more broadly?
A: While manager selection and oversight is a core aspect of our ongoing ESG integration work, we consider ESG broadly across our investment process. For example, as part of our strategic asset allocation decisions, we added a renewable resources sleeve, seeking structural growth opportunities in a number of sectors, including water, agriculture and renewable energy. This investment decision was based on analysis, which suggested stronger expected-risk-adjusted returns and a broader set of alpha opportunities, with a tailwind from evolving regulation, technology and consumer preferences.
ESG considerations may also influence how we define or constrain investment opportunity sets, or where we express a strong preference for active management. We are generally agnostic between active and passive. However, we believe that active management can help support effective ESG implementation in our portfolios, such as in regard to longer-term investments in emerging markets, smaller-cap equity and higher-yielding fixed income.
Q: You mentioned probing individual investment decisions. Can you give examples?
A: Given our manager-of-manager structure, the day-to-day investment and proxy voting decisions with regard to individual securities, resides with the various sub-advisors that we select.
As we discussed earlier, we fully integrate ESG considerations into our analysis. One of the ways we aim to validate effective ESG implementation is by looking through to underlying holdings. In particular, we may request explanations or case studies for specific proxy votes or individual holdings. Our goal here is not to override our sub-advisors, but to reinforce and validate consistent implementation of ESG considerations in the context of respective investment strategies and policy frameworks.