Asset owners should use their investment management agreements (IMAs) to bolster their engagement expectations, according to new stewardship guidance from the Institutional Investor Group on Climate Change (IIGCC).
The report, published today, describes IMAs, which are the overarching legal contracts governing fees, mandates and other objectives, as an “underused opportunity to specify delegated stewardship activities, including engagement priorities, reporting, voting input, participation rights, and escalation steps”.
Appointing asset managers “is the moment to formalise stewardship responsibilities and expectations”, said the guidance, adding that mandates can be tailored “to move beyond ‘standard’ terms” and formally embed higher expectations into IMAs.
“While negotiating bespoke terms may be challenging, particularly for smaller mandates, targeted clauses or side letters may also materially improve alignment,” suggested IIGCC.
It encourages asset owners to “weigh climate stewardship as a determining factor for [manager] selection, including track record, resourcing, escalation practices, and systems stewardship”.
When assessing managers, the IIGCC noted “red flags may include evasive answers, an inability to provide examples, or discordant statements in public interviews”.
However, the report warned against making participation in the Net Zero Asset Managers (NZAM) initiative a dealbreaker.
“Many asset owners consider signatory status of NZAM and other leading investor climate initiatives as a factor during manager screening or due diligence,” it acknowledged.
“However, such membership is best considered as one factor within a broader assessment that also considers a manager’s strategy, governance, and stewardship approach, among others.”
The guidance was published just a day after French asset owners, with support from the Principles for Responsible Investment, published a framework to assess the credibility of managers’ shareholder engagement efforts.
They hope the framework will eventually become a global market standard.
Meanwhile, Railpen revealed last week that it had updated its assessment process for its external infrastructure managers.
“We reviewed how managers are assessed across key areas – including ESG integration, climate risk management and stewardship – and identified areas where the framework could be strengthened,” explained the UK pension fund in its latest stewardship report.
As a result, Railpen has reorganised its indicators “to better capture managers’ ESG capabilities, integration into the investment process and approach to stewardship” and produced guidance on minimum and best practice indicators for its infrastructure managers.
Elsewhere in the UK, the Church of England Pensions Board recently published its stewardship report, in which it revealed it had extended its scrutiny of lobbying practices to asset managers, “to encourage greater market transparency on policy advocacy activities related to climate change”.
