ESG Post-Trade Governance – Potential Consideration

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.

But once you have invested, how do you ensure that the assets you hold remain in line with the strategies for which they were originally selected? What happens when a trigger event occurs, or new data comes to light, which requires that a particular investment be disposed of because it no longer suits your strategy? And what reparations are made when such an event occurs? Here are some thoughts around good post-trade governance practises for ESG products and portfolios…

Asset Review - What measures are in place to ensure that assets invested in continue to be “ESG” throughout their lifetime? What are the trigger events that might cause an asset to no longer be considered appropriate for your ESG strategy?

• Mergers
• Acquisitions
• Diversification of operations
• New information (previously incorrect or not available)
• Etc.

Disinvestment - What happens when an asset previously thought to be ESG turns out not to be so?

• How is the asset disposed of (and replaced)?
• Are investors/regulators informed and how?
• What internal processes are reviewed to learn lessons from?

Product Review – what data, statistics, or other metrics are used to prove that a product continues to justify its ESG category, label, or name over time?

• Is the profile of the product regularly assessed over time, or are there automated alerts in place such that if asset values fluctuate adversely and cross thresholds of a product’s stipulated ESG %age, the firm can react accordingly?
• What happens when a product is assessed to no longer fulfil the requirements of its chosen ESG strategy? Can the situation be remedied, or is a re-categorisation or re-labelling required?
• Re-categorisation – what is your process for re-categorising a product if you find that it has to be changed (e.g. article 9 to article 8, Sustainable Impact to Sustainable Focus, etc.)
• If re-categorisation of a product is necessary, how is your documentation (KIDS, KIIDS, Factsheets, Prospectuses, etc.) impacted, what changes need to filter through to your financial promotions for the product for all your sales channels, and what other aspects of your organisation (or third parties) need to be made aware of the impact?

These are just some of the considerations that need to be made. A strong governance model will already have identified the risks, the mitigating processes, remedial actions, and any required communications. If any of the measures above seem unfamiliar to you, then perhaps your post-trade ESG governance model isn’t as robust as it needs to be.