In the current climate of slow global economic growth and resource constraints at many institutions, integration of ESG considerations in an organization’s investment portfolio may be perceived as a luxury or an unacceptable distraction. ESG implementation does not, however, need to be an all or-nothing decision. A sliding scale of engagement is available for institutions that decide to explore ESG issues.
Steps Toward Integrating ESG Factors Into a Portfolio
To begin, the board of trustees may create a working group, in the form of a subcommittee of the board or investment committee, to research the relevant issues and determine the potential application of ESG processes and principles to the institution’s investment portfolio. The board may also desire to convene an advisory group of stakeholders from the broader community (for example, student or faculty representatives at a university or beneficiaries of a pension fund) to assist or review the committee’s efforts.
Some institutions may also find it useful to retain an advisor with expertise in ESG matters to perform an initial analysis of the portfolio in order to determine a baseline of exposure to defined ESG issues. Once the institution’s ESG experience has developed, it may want to put in place procedures for measuring and monitoring its exposure to ESG factors on an ongoing basis.
Manager Due Diligence
If the institution is working with third-party investment managers, it could add to the standard list of due diligence questions some inquiries about how the manager examines ESG issues. Some examples might be:
Does the manager integrate analysis of financially material environmental, social and governance issues into its investment process?
If so, please describe the manager’s approach to assessing ESG risks and opportunities.
Provide a copy of any existing ESG policy.
How has analysis of ESG issues affected the manager’s portfolio design?
Provide an example of how ESG factors have affected specific investment decisions.