Lessons from the Leaders

1. Know Yourself. Identify your principles and investment beliefs, then build your investments around that framework.  Work to understand the non-traditional financial risks that could impact long-term value creation in your portfolio and make sure those risks are properly priced and addressed. You can only engage effectively with portfolio companies and stakeholders if you truly understand and believe in your approach.
   
   
2. Normalize the conversation with the board.  Make sure the board, senior management and the organization are on the same page when it comes to ESG.  Agree on standards that make sense to your stakeholders.  The board should approve your responsible investing statement as a core component of the fund’s investment philosophy. 
   
   
3. Work hard on communicating. Develop a culture of transparency.  Being open about responsible investment practices promotes “trust and confidence” among stakeholders, the public and the investment community, all key to success. Continually refine your communication protocols. If you don’t communicate your responsible investing principles and investment framework effectively, it will limit your chances for success.
   
   
4. Be the “author” of your own story, not a “character” in the play.  Sustainable and responsible investing practices are gaining broad momentum, supported by academic evidence, regulatory policies, stakeholder interest and public pressure. Funds on the Leaders List have been addressing non-traditional financial risks for years. They believe it is better to get ahead of the curve than to wait and have the issues forced upon you.
   
   
5. Start with the low hanging fruit.  When it comes to implementation, begin with the tasks that are easiest for your organization.  For example, introducing ESG into the due diligence process for private equity may provide a quick win.  The process already exists, you simply need to define additional criteria and standards.
   
   
6. Build internal champions. For many funds on the Leaders List, sustainable investing has become part of the DNA that permeates the organization. Early on, however, the leaders noted how important it was to develop internal champions who could help in setting goals, working with staff, and moving the agenda forward.  
   
   
7. Join a responsible investing association.  Use your peers as a sounding board. Exchange ideas with the community. Get a roadmap. See how you compare with like-minded institutions. Benchmark yourself and show the results to the Board and to stakeholders. Understand that this is a “live” process. Work on building up your expertise and assimilating best practices from peers with shared values. 
   
   
8. Don’t try to save the planet; stick with stewardship. Your work should always be aligned with the final objectives and goals of the fund.  A robust responsible investing program really means making sure that the companies you invest in know what they are doing, operate with a long-term perspective, understand both traditional and non-traditional risks, and price and address those risks properly and consistently. 
   
   
9. Socialize your responsible investment beliefs throughout the organization. Fund leadership must carry the torch, set goals, and challenge the organization to deliver, but if you really want to build a successful, sustainable investment process, everyone needs to buy in, from top to bottom.  Create an environment where investment professionals at the fund understand and internalize non-traditional ESG risks.  Make ESG considerations part of everyone’s evaluation process. 
   
   
10. Set up a reporting framework to monitor your progress. Establish goals and metrics to help gauge your organization’s success over time. Has the carbon footprint of the portfolio been reduced? Have portfolio company governance practices improved as the result of engagement? How often did you vote against managements and on what issues? Report publicly and transparently on the outcomes of your efforts. 
    

Alternative Choices

Emphasize the long-term. Asset allocators must constantly iterate long-term goals and objectives for their funds. An important part of this message is to articulate that the inclusion of ESG factors in the investment process is vital to long-term risk mitigation and value creation.

Engage and cooperate. The Leaders will divest holdings in companies as a last resort, for example if they violate the Fund’s investment beliefs or normative based principles, but it is not their preferred strategy. They would much rather engage with managements and work together to achieve positive externalities. They also believe in cooperating with like-minded institutions to build capacity and promote systemic change.

Turn consultants and external managers into allies on sustainable investing.  Ask about standards they use and risks they feel deserve the most attention. Learn from their experience, take advantage of their data sets, see what tools they can offer. Put your external managers on the front-lines in working with portfolio companies. Give them uniform standards and ask them to report back on sustainability metrics for the companies they own on your behalf.