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How to implement a Responsible Investment Policy?

How to implement a Responsible Investment Policy?

Thursday 10th March 2022

The use of ESG (Environmental, Social, Governance) in the investment and private equity community helps measure the degree of demonstrative social and environmental alignment in an Private investment firm's portfolio.

The adoption of ESG has been primarily driven by stakeholders such as investors, portfolio companies and employees who now want to see that businesses and investment firms can transparently report and disclose their commitment to ESG approaches and issues.

Many fund managers are now developing strategies, management systems, reporting tools, and PR campaigns to match stakeholders ESG expectations.

Hence why many fund management leadership teams are creating responsible investment policies as a first step towards integrating ESG as part of their overall governance processes and operational business model.

As monitoring ESG progress and outcomes against targets will continue to be challenging without regular and reliable data from their portfolio of private equity companies' firms "portcos", there is a clear role for cloud based ESG Portfolio Management platforms.

What is a responsible investment policy?
A responsible investment policy helps demonstrate a company's commitment to incorporating ESG concerns as part of the investment decision making in order to manage risk and achieve long-term profits.
A policy's purpose helps encourage investment professionals consider the wider ramifications and value implications of investments within an ESG framework such as TCFD or SASB.
Policies additionally provide benefits, including:
• Clear direction of a companies purpose that will guide employees, limited partners, and other stakeholders
• A clear purpose statement communicates a firm's core beliefs and responsible investment approaches
• Prompts alignment of activities and actions with relevant stakeholders including investors, investment professionals, regulators, portfolio company employees, and local communities
• Establishes consistent approaches to implementing and integrating ESG considerations
Ideally at the very least a responsible investment policy describes the firm's overarching objectives, targets, goals, approaches, governance, and guidance when managing ESG issues across the investment lifecycle.

Who has the responsibility to create an responsible investment policy?
Preferably a member of the executive team should lead the development of the policy backed with enough support and allocated resources to ensure implementation success. Ideally this same person will then drive the challenges of securing buy-in from across the firm.

Start with collaboration events that drawing in senior management oversight and cross-functional expertise.
This team should sharing out tasks and commitments to:

• Making a business case for ESG implementation
• Define ESG investment policy's goals
• Write the ESG investment policy
• Engage internal stakeholders to gain opinion and buy-in across the firm
• Leverage insights from external stakeholders or partners
• Consider using ESG consultants help oversee
• Secure the multiple levels sign-off from across departments, teams and divisions to ensure buy in.
• Create implementation plane that includes training, processes, and controls for putting the policy into practice
Consider appointment of a ESG Director or Head of ESG to lead implementation to aide policy adoption as it is beneficial a senior person fully owns and drives implementation as well as maintaining governance over the policy.


Why setting up cross-functional working group fast tracks implementation?
Establishing a cross-functional working group and include investment and portfolio teams in the policy creation and sign-of as this also helps guide the ESG policy through development. Key members of the firm should also have the opportunity to provide comments early on in the process ( which can be achieved by email surveys) will help ensure successful implementation.

Working Group responsibilities often include:
• Provide input and approval, as well as supporting ESG policy implementation
• Socialise the policy by engaging with different departments such as Investor Relations, Client Relations, Legal, Public Affairs, etc.
• Increasing internal and external awareness of ESG investing and the new policy
• Clarifying and supporting internal training
• Agreeing what the key policy components are

What are the components of best practice development of a responsible investment policy?

The final agreed approaches will be influenced by the firm's investment strategies, given any policy must be tailored to investment fund's profile, however, here are a few key policy components to consider:

Purpose
ESG policies should communicate a clear purpose of ESG vision which states why the firm has committed to specific ESG issues. Beyond typical standard issues such managing risk, or creating value for stakeholders of the portfolio companies so do consider why your firm exists?, why do employees come to work? And what impact are you having on society and on the environment? With investors inquiring more and more frequently about what your firm is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it's important your purpose statement answers these questions.

Scope
The policy should specify which assets and asset classes are covered, as well as whether the policy applies to present investments or solely to future investments. Fund managers should also include language detailing their approach to minority and non-control investments, as well as global and regional business stakes. The firm should also consider tailoring its engagement strategy with portfolio companies to match its level of influence.

Priorities
Fund managers should concentrate on addressing your main materiality issues, being the ESG challenges and requirements. Firms with specific emphasis areas (such as a sector, geography, business, or asset class) should also consider outlining the material concerns that they will frequently address.Helpful resources and guidance on setting and understanding priorities include the United Nations Sustainable Development Goals and the Principles for Responsible Investing (PRI).

Governance
The policy must also be embedded in a governance structure with progress being driven by workflows so it is clear who is ultimately responsible for the policy and its day-to-day implementation throughout the investment lifecycle, i.e., ESG officers, committees, operational teams, regional teams, board members, etc. The policy should also specify who is responsibility for investing decisions sign off of each ESG factors.

Implementation
Firms should explain how they plan to implement their ESG commitment across the investment lifecycle, both pre- and post investment. The policy should also consider any investments the firm will exclude due to products and services that have potential negative impacts on society and the environment. Defining due diligence, such as how to screen for ESG risk and opportunity, is part of the pre-investment process. Firms should also evaluate ESG risks and value creation opportunities in the portfolio after investing, create ESG expectations for portfolio companies, track progress toward those objectives, and assist portfolio companies in meeting them.

Reporting
Fund managers must be able to define how they'll report disclosures to investors and/or other stakeholders on ESG practices and policy execution, as well as when and how theses disclosures are made public. Firm must decide on the level of transparency they wish to provide but if the firm is a PRI signatory, you can pick from a variety of voluntary and mandated reporting frameworks such as TCFD.

Reviews, improvements and revisions
Firms should commit to regularly updating their responsible investment policy to reflect future changes in the firm's portfolio, external best practices, or regulations, as well as changes in the firm's growth and investment strategy, business drivers, asset class expansion, investor demands, and emerging themes. Always include a date on your policy to inform stakeholders when it was written or modified.

Once finalised, the firm must implement and uphold the policy. Make sure a clear implementation plan has been developed with measurable action items, including portfolio-wide key performance indicators and improvement plans. Other critical steps include communicating the policy to appropriate stakeholders, training investment professionals on the policy and its relevance to their functions, and measuring results using key performance indicators, ESG software, and/or measurement tools to demonstrate outcomes and show the value of the policy.

Strong policies guide positive commitment
Across the financial industry, investors and their stakeholders are utilising ESG criteria to screen investments, manage risk, enhance returns, and tailor portfolios to a group of increasingly socially conscious investors. Trends such as climate change, increasing environmental regulations, technological innovation, and social activism are merging with a new era of transparency that makes ESG management critical.

A practical, effective responsible investment policy demonstrates a firm's commitment to ESG issues and provides a foundation by which institutional investors and stakeholders can hold fund managers accountable. Responsible investment policies can also address misconceptions around fiduciary duties, provide a common language around ESG issues, and establish clear mandates to guide investment teams.


Why cloud-based ESG Platform help achieve implementation success?

The use of cloud based ESG technology platforms will greatly assist team members, day-to-day tasks such as stakeholder engagement, content development, workflow sign-off.

By using ESG portfolio management platforms, you can now easily define and manage the organisation's ESG purpose, policy and goals across any number of divisions, business units, offices and teams irrespective of locations or geographies, and operationalise an ESG culture and governance process in a more co-ordinated and cohesive way. Once the board and the ESG leadership team have created impact targets across company users and data owners in every office or locations can simply log in and manage their own personal set tasks and activities across any number of programmes, projects or stakeholders.

Users and data owners can undertake their tasks separately at their own pace or simply respond to brief email survey requests from the ESG team meaning data provided is automatically captured directly. As it all happens within one cloud-based ESG platform, the captured data is collated, curated, monitored, aggregated and analysed in real time, so it instantly available via dashboards and reports. This means leadership at local, board and C-Suite levels can see overall ESG performance without waiting for time consuming excel workbooks to be completed. Additionally the ESG team can also manage progress of achievements against set targets by creating disclosures quickly using built in workflow approval processes. The benefits are numerous as now aggregated business wide analytics and disclosures can easily be gathered and created from across every individual business units whilst ensuring full alignment to the boards set purpose.

Use an ESG Platforms with a built-in materiality assessments capability
An ESG materiality assessment empowers your ESG team and helps them capture data and enables easy reporting of your current state and outline future initiatives while taking into consideration your business goals and risks.

Want to learn more about ESG? Join our free webinar series, ESG in Practice.