ESG Pre-Trade Governance – Potential Considerations

If you are an Asset Manager investing in ESG strategies, the chances are you will have a strong governance model over determining what represents an ESG investment in line with the strategy for which you are investing.

Whilst the rules around what you can invest in for particular strategies are strengthening all the time, the issues around consistent, reliable, and accurate data are still with us. This means that even stronger governance is required until the data can catch up with the rules. So how does your firm ensure that all the requirements have been met before you invest in that security that you want to include in your portfolio? Here are some thoughts around the pre-trade governance requirements that you might need in place in the investment process…

Research - How do you identify assets to invest in which match your ESG aspirations?

o   Only do your own research, or use external parties?

o   How do you ensure you can trust external research?

o   How do you ensure sufficient data is considered where availability is limited?

o   How do you apply consistency in considering ESG factors from multiple sources?

o   How do you balance ESG factors with opportunities for investment returns?

 

Justification Criteria – How do you assess potential investments?

o   What criteria must be satisfied to justify submitting as asset to any internal approval process before investing?

o   What are your ESG tolerances?

o   Can tolerances be flexed if certain other conditions are met?

o   Do your own internal tolerances ever change?

o   What are the minimum data standards?

 

Approval Process – How is an investment approved by your organisation?

o   What are your internal processes for submitting a request to trade as an ESG asset?

o   What information must be presented?

o   Who reviews ESG asset worthiness in the approval process and has the ultimate say?

o   What is the workflow and approval process?

o   How long does the process take?

o   What are the obstacles and potential fail points?

o   What is recorded (whether approved or rejected)?

o   Can the decision be appealed (if rejected) and if so, what is the process and justification for this?

o   Once approved, will your justification evidence stand up to regulatory scrutiny by: -

• your internal governance process,
• your auditors
• the regulators

 

Record Keeping – What records do you keep and how accessible are they?

o   Investment Research - All originals? Downloads or links to specific external papers?

o   ESG Assessment - What evidence do you keep about how you judged the ESG factors of a potential investment? Whether invested or not? What factors were considered? How did you “scorecard” against the factors? What was the outcome?

o   Approval - What papers were submitted for approval prior to the decision being made? What discussions were had at the approval meeting? Who was present? What was the outcome and supporting reasons for either approval or rejection? Are detailed minutes kept in addition to detailed searchable records?

o   Record Retrieval - How easy is it to access details of research and decisions about investment? Is there a searchable database where searches can be made by date ranges, or by company, or by individual (research analyst, fund manager, approval committee member (where present at approval meeting))?

 

These are just some suggestions that Asset Managers may wish to consider for inclusion in their own Pre-Trade ESG Investment governance and process. There are bound to be others, but what is key is that Asset Managers think carefully about whether the decisions they make today will still be justifiable, with sufficient evidence of what was considered, proven robust procedure, and appropriate approval when challenged by regulators in the future.