The momentum behind ESG investing continues to grow. Firms that develop a solid approach to incorporating ESG policies at both the firm and the fund level will have a competitive advantage over their peers.
At the heart of incorporating a sound ESG strategy lies governance and policy. The philosophy and approach to ESG need to have buy-in from the entire firm, especially at the most senior levels. Without top-down support and action to back it up, any ESG philosophy risks not “walking the talk.”
“Without good governance underlying the creation of the ESG approach, it is on a rocky foundation. It is key to have that governance oversight, at all levels, but particularly having a focus from the Board of Directors.” –William Bryant, North Peak Advisory
However, top-down support is not the only factor that ensures good governance. Fund managers need to see ESG less like a box to check and more as a holistic review of their management and investment philosophy.
“I think a lot of managers don't spend enough time thinking about their philosophy and their culture and their values, and getting that piece right from the outset is imperative.” –Rebecca Palmer, Waystone
A thorough and well-constructed policy helps enforce good governance and can help ensure that all stakeholders are accountable. As a starting point, these components should be included in a robust ESG policy:
The firm’s overall ESG philosophy.What is the internal philosophy for pursuing ESG in the way you’ve laid out? What values of the firm align with these aims?
Scope and policy details.This is the meat of the policy and should layout details such as whether your firm is simply exclusionary or actively factoring ESG into the investment process.
Reporting and monitoring.What metrics do you capture, how do you capture them, and how are these findings communicated?
Internal capability and ambition.What are your in-house capabilities, and what are your future ambitions with ESG?
Oversight and governance.Who’s responsible for maintaining this policy and living up to ever-increasing regulatory pressure?