Sara Benwell: As an asset owner, how important is evaluating and monitoring an asset manager’s ESG integration capabilities?

Catherine Chen: It’s absolutely critical. We want to make sure that the investment activities of the managers we use are in line with our policies and beliefs and those which we enact on behalf of our customers.

So, historically AOs tended to fully delegate all the investment activities to asset managers with limited assessment of how they were actually managing our assets. Now, to exercise our stewardship responsibility, manager monitoring is vital  to ensure that AMs actually manage for us in line with what we promised our customers.

Sara Benwell: Once a manager is selected, what sort of monitoring mechanisms do you put in place?

Catherine: Last year, we developed a RI manager monitoring framework to ensure that external managers do exactly what they intended, together with evidence and case studies to show that the practice is in line with the way we want to manage for our customers. 

The framework was designed to have annual due diligence questionnaire to cover 3 categories (1. Policy and resources, 2. ESG integration and 3. Voting and engagement) to assess AMs activities on regular basis.  

On top of the annual questionnaire, regular stewardship meetings with our existing asset managers are conducted to keep healthy relationships in order to work together toward better RI practices.   A final dashboard is conducted to benchmark all the asset managers who manage assets for us, and we will engage closely with asset managers who don’t meet our RI expectations.

Sara: What are some of the challenges with manager monitoring and how do you overcome these?

Catherine: The key challenges arise when we actually dive our noses into the fund level questions where the responses from asset managers are generally either very high level, or relatively commercial.

This is typical as most of the responses are filled up by AMs’ RFP teams who may not be familiar with fund-specific questions.  To tackle this challenge, we need to spend time on follow up meetings with asset managers or fund managers to get our fund specific answers. 

Sara: What are the triggers for poor performance? If a manager is not performing well, what how can this be managed?

Catherine:  Our asset manager monitoring Due Diligence Questionnaire was composed by three categories.  Therefore poor performance may result from any one category or various combinations of the three.

Based on their written responses or the meeting with our managers, we conclude our final rankings and flag them as red, amber and green.

For those fund managers that are classified in the red, we will compile all the feedback to them to and give them three years in total to improve.

We work through three stages. At the first stage they get a year to improve. If that doesn’t happen, we require a formal presentation on their plans. If problems extend to the third year we escalate to the board and propose an exit strategy.

Sara: Given the lack of consistency on ESG data between managers, how easy is it to compare one with another?

Catherine: It's rather challenging in general, but the industry is moving towards a better status. At the fund level, the third-party ESG fund rating data coverage is improving however, ESG fund rating on bespoke funds are limited given its technical issues. 

As an asset owner, we could obtain ESG fund rating data in terms of an aggregated basis (i.e. ESG rating from each of investee companies) but the fund level’s investment process from the ESG perspective is something we are eager to have from 3^rd party providers.   

 

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