New asset owner model to strengthen ESG integration by managers

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Theresa Whitmarsh, former executive director of the Washington State Investment Board and Hiro Mizuno, former CIO of the Japan Government Pension Investment Fund, the world’s largest pension fund, are behind the latest investment tool to support integration ESG and prevent greenwashing.

The Coalition of Pension Funds for Inclusive Capitalismmember of the Coalition for Inclusive Capitalism and co-chaired by Theresa Whitmarsh and Hiro Mizuno, published an open resource model to help pension funds structure contractual language in their investment agreements with asset managers around ESG integration in public and private actions. The resource is intended to protect against the superficial implementation of ESG and to enable asset owners to better guide their asset managers to invest in line with their priorities.

Standard contract language establishes minimum ESG guidelines for use in investment agreements with asset managers as well as private equity side letters and LP agreements. Whitmarsh and Mizuno worked with pension fund managers and legal advisors to develop the model which includes a prototype to integrate asset owner reporting requirements and voting rights and is another building block of the infrastructure. crucial market underpinning sustainability and impact investing.

The models can also be tailored to the ESG and long-term investment priorities of institutional investors. “Our goal is to give asset owners better tools to evaluate asset managers in terms of alignment of their beliefs and how they are expressed,” says Whitmarsh.

She adds that the initiative has its roots in an early survey of asset owners exploring how investors expressed their views on ESG in their contracts with asset managers. “We found nothing,” she recalls. “Although asset owners had discussions with their managers and expressed opinions via proxy voting and exclusion criteria, for example, no asset owner had contractual language: although the whole ESG approach has evolved, the contracts have not changed.”

Whitmarsh adds that Mizuno also spearheaded the initiative when he was at GPIF, working with the Japanese asset management community to try to embed contractual language into GPIF mandates to enable the pension fund to better monitor how its assets have been invested in line with its ESG wishes. . “The GPIF is such a big owner of assets and its demands have been answered, but despite its influence it has struggled to get language into contracts.”

This led them to engage with the legal profession to develop a companion playbook for asset owners. She notes that the model avoids being overly prescriptive given that ESG is always an expression of judgments and viewpoints. “We recognized that there is a wide range of ESG approaches. There’s no one way to express ESG beliefs, so we’ve created a handbook and template approach with plenty of options.

Asset owners were quick to hail the initiative. “It’s important for large asset owners, including pension funds, treasurers and endowments, to know how to structure an optimal relationship with their investment managers,” said Michael Frerichs, State Treasurer of the State. ‘Illinois. “Asset owners have a vested interest in ensuring their managers use best practices that add value and meet their needs. This includes incorporating ESG factors into investment decisions, adopting strong proxy voting practices, and providing robust reporting on investment management and stewardship activities. The model language will help investors structure strong relationships with their managers and help create consistent standards across the market. »

“Pension investors and asset managers must create long-term value for clients and beneficiaries by considering social and environmental outcomes,” said Gordon J. Fyfe, Chief Executive Officer and Director information systems of the British Columbia Investment Management Corporation (BCI). “Standard tools such as model mandates can support portfolio managers’ approach to consistently applying ESG principles.”

Whitmarsh also thinks asset managers will welcome the model, especially as the legal language of the contracts has been carefully vetted. She notes how managers are reluctant to incorporate strategies around, for example, proxy voting into contract language despite clear guidance from asset owners for fear it could trigger compliance issues.

“This language has been subject to many legal revisions,” she concludes.


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