New asset owner template set to strengthen ESG integration by managers

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 investor tool to support ESG integration and prevent greenwashing.

The Pension Fund Coalition for Inclusive Capitalism, part of the Coalition for Inclusive Capitalism and co-chaired by Theresa Whitmarsh and Hiro Mizuno, has released an open resource template to help pension funds’ structure contract language in their investment agreements with asset managers around ESG integration in public and private equity. The resource is intended to protect against superficial implementation of ESG and enable asset owners to better direct their asset managers to invest in line with their priorities.

The model 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 collaborated with pension fund managers and legal advisors to draw up the template which includes a prototype for integrating asset owner reporting requirements and voting rights and is another building block in the crucial market infrastructure supporting sustainability and impact investment.

The templates can also be tailored to asset owners’ ESG and long-term investment priorities. “Our aim is to give asset owners better tools to evaluate asset managers in terms of their alignment of beliefs and how they get expressed,” says Whitmarsh.

She adds that the initiative has its roots in an initial asset owner survey 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 views via proxy voting and exclusion criteria for example, no single asset owner had contract language: although the whole ESG approach has evolved, contracts haven’t.”

Whitmarsh adds that Mizuno also led on the initiative when he was at the GPIF, working with Japan’s asset management community to try and get contract language into GPIF’s mandates to enable the pension fund to better control how its assets were invested in line with its ESG wishes. “GPIF is such a large asset owner and his requests were responded to but still, even with his clout, he struggled to get language into contracts.”

It led them to talk to the legal profession to draw up a playbook to support asset owners. She notes how the template avoids being too prescriptive given ESG is still an expression of judgements and viewpoints. “We recognised there are a wide range of approaches to ESG. There is no one way to express ESG beliefs so we have created a workbook and template approach with many options.”

Asset owners have been quick to welcome the initiative. “It’s important that large asset owners, including pension funds, treasurers, and endowments, know how to structure an optimal relationship with their investment managers,” says Illinois State Treasurer Michael Frerichs. “Asset owners have a vested interest ensuring that their managers are using best-in-class practices that add value and serve their needs. This includes the integration of ESG factors into investment decisions, the adoption of strong proxy voting practices, and the provision of robust reporting on investment management and stewardship activities. The model language will help investors structure strong relationships with their managers and it will help create uniform 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 CIO at British Columbia Investment Management Corporation (BCI). “Standard tools like model mandates can support the approach portfolio managers take to consistently apply ESG principles.”

Whitmarsh also believes asset managers will welcome the template, particularly given the legal language in the contracts has been heavily vetted. She notes how managers are reluctant to enshrine strategies around for example proxy voting into contract language despite clear guidelines from asset owners lest it trigger compliance issues.

“This language has gone through a lot of legal review,” she concludes.