Helping fund managers prepare for the ODD and ESG of today

Connie: Hello, everyone. We’ll just give a couple of minutes for everyone to dial in before we start the webinar. So, if we may ask you, you know, just to stay a minute or two before we kick off. Thank you. Hello, and good morning, everyone. Welcome to this webinar and thank you for joining us this morning. My name is Connie Wong. I am the executive director with Waystone based in Singapore. So, today’s topic is Helping Fund Managers to Prepare and Navigate for the ODD and ESG of Today. ODD is surely not something new to most of the managers today when it comes to the interaction with investors, especially, of course, during the fundraising stage.

Discussion Topics

So, what we wanted to cover today is the key areas that investors are looking at and what has changed over the last 12 months, especially the stage where we are working remotely, utilizing different kind of virtual platforms. What are the consequences for our experts have been seeing when they are evaluating a fund and how managers can tackle them?

And of course, the second part of the webinar, we’re going to touch on the ESG, which is a very topical agenda, and the hot potatoes in the market where everybody was talking about that. And I was doing some research when I was looking at this topic and something very interesting that popped up that I’ve seen as of the latest of first quarter of this year, some $2 billion a day that flow into sustainable investment funds with a total amount of $2 trillion assets. So, we thought it would be good for us to share how the fund managers they can integrate ESG in their own investment portfolio without too much compromising their own philosophy and thesis. And of course, what are the tools available in the market that managers can use to assess the ESG rating?

And last but not least, which is a Q&A session. So, you all see a chat box on the right side of your screen. And you can send in the questions anytime to us throughout the presentation. And I was strongly suggesting you guys doing that because we have three amazing speakers joining us this morning. Igor, the senior consultant at Mercer, has been heavily involved and also the discussion with investors almost on a day-to-day basis, and of course, with the managers during the ODD process. And my fellow two lady panelists, Rebecca, director with Waystone, and also Konstantina, the head of risk analyst at State Street. So, without further ado, and I think before we get into the content of the ODD and ESG, if I may ask each of the panelists to give us a brief introduction of your fund and at a very high level, how you have seen in the industry. I can maybe perhaps ask Rebecca first and then followed by Igor and also Konstantina.

Panelist & Fund Introductions

Rebecca: Great. Thank you, Connie. And just there’s a background noise on the recording. So, I don’t know if everyone else can just go on mute. Sorry. Thank you. So lovely to join you. I’m based in the Cayman Islands hence why it’s dark behind me. So, good morning to you all. And so lovely to be here. For those of you not familiar with Waystone, we are a risk governance and compliance firm. So, as a professional financing director, it’s perhaps not surprising that I’m very much focused on the G in ESG. In terms of the conversations, we’ve been having with our clients and managers that we work with, I think a number of our managers are getting a lot more detailed questions around what they’re doing around ESG. As Connie said, you know, is a hot potato to coin her phrase. We are finding that some of our managers are being caught a little bit on the back foot by the due diligence process and investors asking them about what they’re doing around ESG.

So, what we really hope with this webinar today is to give you some tools to help you prepare with that. In terms of kind of how we see in the industry adapt to ESG, I mean, this is very much traditionally a long-only area of focus. Now we’re seeing a number of new entrants in the market with some really interesting products. I think the fund industry itself is so nimble and able to adapt to these different trends that we’ve seen with Engine No. 1’s successful proxy battle with ExxonMobil, the real impact that we can have as an industry in this area. And I think ESG is quite unique in many senses because it’s something that’s been very much investor-driven. And we are seeing some different geographical ways of addressing ESG. Obviously, Europeans have led the way in terms of legislation, but, you know, the other jurisdictions aren’t too far behind. So, with that, I will stop and hand over to Igor.

Igor: Thank you, Rebecca. Just to give a quick introduction about myself. So, my name is Igor. I’m the head of Mercer Sentinel in Asia, which is a dedicated team within Mercer. We are kind of specialized conduct operation risk consulting, operational due diligence, custody consulting, and as well as transition management for our clients. To give a broader picture of Mercer, Mercer is a global consulting firm, and we are usually in the areas quite strong in health, career, and wealth. And within the wealth business is that it’s where my team is sitting, the Mercer Sentinel team. And so besides operational due diligence and consulting, we also provide other services to our clients, which is also part of the nature processes about investment due diligence, investment consulting for our institutional investor when it comes, for example, to strategic asset allocation. And obviously, our third pillar, which is where we are also, I think, probably quite famous at the moment in the market and one of the leading firms, our OCIO business, where we currently kind of hold almost $3 billion on the asset under management.

To give you a flavor of what our typical clients are, it’s really institutional investors, endowments, foundation, pension funds, government agencies, or banks or insurers. Even family offices and partially managers are engaging us in certain engagements. And on the point which Rebecca highlighted that ESG is kind of driven by investors, I think it’s the same observations we are seeing here because the regulations across the globe are advancing at different speeds. And as well, I think it’s a hot topic as also Connie said. It’s always been a discussion every day in the news, everybody who receives newsletters or bombarded with new announcements of ESG managers, sorry, ESG strategies implemented by managers or what we recently see, a lot of impact funds have been launched or bigger global managers established center of excellence, particular focus on ESG.

And so, you can see in the market, the demand for ESG experts is quite high. So, it’s not easy to fill all these gaps, but I think we are moving into the right direction for the moment. But I think from my perspective, we have to keep in mind is there’s no common formula for that. I think different asset managers offer different solutions and as well, it’s really driven by regulations and, as mentioned before, regulators are advancing at different speeds. So, it will be interesting to see over the next few years how we come together as a whole organization globally and adapt the ESG aspect of our investment process and in our due diligence process. That’s from Mercer. Thank you very much. I will hand it over to Konstantina.

Konstantina: Hello, everybody. And apologies for not having my camera on. I’m having a bad IT Day today. So, my name is Konstantina Founta and I head the risk analytics department in State Street where the ESG solution lives. So, just a quick introduction to ESG within State Street. This is not a new topic for us. State Street has been involved in research and monitoring and reporting solution around ESG for over six years. But what is actually new is the integration of ESG factors within the analytics space. It was a strategic move because we believe that ESG should not be seen in isolation, but seen, you know, holistically within the investment analytics across the assets.

A little bit about our clients. So, here in APAC we service asset owners, asset managers, and hedge funds, but we are part of a global team, so we see how globally the ESG trends evolve. The ESG reporting and monitoring as we see here in APAC is driven as Rebecca said from investors at the moment, not that much from regulators. Although we see this changing quickly as we had many markets across APAC, you know, issuing consultation papers and so on. Also, as we see across different aspects of investment analytics not just ESG, there is a domino effect going across regions. So, when there is a regulation in one jurisdiction it will most likely affect different regions. It’s a global topic. Again, I will repeat, it’s a hot topic. It means 100 different things to 100 different people. I think the key for ESG is flexibility. Flexibility in the way of seeing it and integrating it into the investment decision process and also reporting and monitoring. Thank you.

Connie: Thank you, everyone. I think that’s very insightful, you know, the level of the way that you are seeing in the market and who is driving that kind of way in the industry. I guess the first question maybe that’s mostly to Igor is about, you know, in the current time I think we are moving away from the pandemic towards the endemic, what ODD looks like. And has there been any focus shaped by investors? I think that’s something most of the managers here they would like to know and also to get your experience from that.

ODD Investor Focuses

Igor: Sure. I think it’s a good question. Maybe we have to go back a bit where maybe last year February when COVID was kind of picking up unfortunately across the region. It definitely impacted the ODD process itself because when we look at the traditional ODD approach, which was always required to conduct an onsite visit, what does it mean? It means seeing the manager, visiting the office, traveling, inspecting the confidential documents onsite which cannot be shared through email, inspecting the data centers. So, with COVID and with the travel restrictions, obviously, it was not possible for us to conduct it. And to be honest, at that point of time nobody really knows what’s going to happen, I mean, to the extent maybe some of us thought we are going to lose our jobs, right, because investors expect the onsite visit.

But from our investor perspective, of course, they had to make a decision because looking at COVID was not disappearing as a lot of people expected. And the market still was kind of volatile and, in particular, China was doing pretty well. Managers had to make a decision. Investors had to make a decision. So, what are we going to do? Are we going to delay our investment or funding with the manager? Are we going to restrict our funding only to managers which we know? That means we have already seen them before, we have conducted operational diligence, or we know them for our relationships. Or eventually, the third approach was thinking about a different way. We call it nowadays based on operational due diligence. That means we set up like today a conference call with the different managers and then their stakeholders and then go through their operational due diligence process and questionnaire.

I remember in the beginning there was a lot of skepticism from investors saying, “You don’t need the managers. How do you assess the knowledge? How do you assess the premises?” Yes, I agree the skepticism was kind of justifiable, but I think it was important for consulting our ODD experts to kind of show we are not compromising on our quality because we are adapting our approach. And the beauty about ODD is that a good ODD is always dynamic because ODD is always driven by market requirements, investment demand, and regulations. So, it all comes together and usually, we are able to justify our change in the ODD process which led to the operational due diligence which is conducted virtually. And what does it mean for managers is we had to ask specific questions about how do you manage the COVID situation, how is your BCP planning, how is your cyber security set up, the infrastructure set up?

So, generally, I think those were kind of areas of focus which we needed to assess and, in my experience, to share, I didn’t see a big disruption because the asset management industry or the managers were kind of ready to adjust and able to activate the BCP plan which was active for most of the managers. It also showed to the investors certain benefits to be honest. Instead in the past when we conducted ODD on most firms you visit the manager for one day, you have a six to eight hours discussion, go through the different functions. Now we could spread it over two to three days which gives a lot of flexibility for both parties. The CFO, CEO has more time to dedicate, is able to share more, there’s no time pressure. Let’s say documents were able to share via virtual data room. Of course, we had someone has to sign NDA. But it means we still had access to confidential information and the development of the IT infrastructure and the digitalization which was kind of accelerating the process was quite helpful.

So, we could overcome the challenge and help investors to make an opinion about the manager and the operational setup. So, I think it was quite well managed across the industry and even addressing the topics of concern investors had about cyber security, working from home, trade execution because in the past traders usually would work from the office and only execute trades from home, and offsite trading was not very common. But I think now with adapting to situation a lot of managers have kind of revised the operating model, have adapted. Let’s give you an example, of course, allowing trading from home, implementing Bloomberg anywhere, thinking about cloud computing instead of having a primary data center on site. So, there was a clear shift you could see, even the discussion. Do I still need a VCDR site somewhere? Actually, we can’t even visit, everybody has to work from home.

So, there were certain cost savings also to consider for manager. And as well there were cost savings for clients because we don’t need to travel. And travel budget was always a big expense item for investors, so they could save on that. So, I think the outcome was well managed across the industry and I think the investors are kind of used to the approach we are currently driving in the industry. But we have to observe I think over the next few months, maybe six, seven months, are we going back to on-site visits and are we going back to the traditional model? In my view I think it will be a risk-based approach, say that if we know the manager, if we have seen them before, probably we don’t need to come back to do a full ODD with a full on-site visit. But probably for new managers which have, for example, only incorporated or the PM or the COO is not that well in the industry, then obviously the on-site visit will probably be triggered by investors and that will be a requirement. So, that’s a much better summarize.

The ODD Process

Connie: Thank you, Igor. I think that’s really interesting to hear from you also. The change of form of the ODD process and the kind of slightly different angle or additional part of the component, investors are looking into that. You mentioned about the cybersecurity, you mentioned about the way that the managers are operating their business. I have one, just out of curiosity. Are you seeing any increased investor focus on the ESG and also perhaps the board diversity? And how has the due diligence process evolved, if any, to incorporate these factors?

Igor: Yeah. That’s a good question. I think it comes initially to the point I was explaining the ODD process is quite dynamic and always driven. As ESG is driven by investors, our ODD process is also driven. So, investors requesting for this scrutiny to understand how the manager incorporated ODD in the investment process to make an informative decision, to make sure they align with the investment guidelines, and what kind of ESG data are used to establish these investment guidelines and ESG ratings. But as well, managers want to understand as you correctly highlight what happened at the firm level. What does the manager do on diversity inclusion, how they really incorporate these values in their corporate culture.

And this is an important factor because it will always align as well with the interest of the investor and the manager. There should be a natural alignment and if there’s a disagreement, it could be a difficult challenge to overcome over time. And from our…Sorry. I can add in on the ODD perspective, obviously, what happened is ODD experts will focus on this area and want to understand how the manager overcomes it, incorporate that. But it’s not only having a policy in place and having a signatory to any guidelines or principles. It’s really demonstrating it, how you listed, how you are able to prove it in a quantitative approach as well.

Independent Director Interactions

Connie: Okay. Thank you, Igor. That’s really good that you shared a part of what you’ve been seeing along the process, how it evolved. And while we’re on the topic of the board diversity and, Rebecca, I know you sit on board as the independent director, you possibly have been talking to the investors, especially with managers as well. And with anything you wanted to share, perhaps here, like, how you think the interactions amongst various party as the independent director?

Rebecca: Yeah, absolutely. And I think Igor’s point about culture at the firm level is incredibly important. I think investors increasingly want to understand what’s going on under the hood and they want to invest with the good guys. What we’ve really seen, I think, is around the ESG due diligence that the questionnaires have really evolved. A couple of years ago, it’s very much, do you have an ESG policy or are you a UNPRI signatory? And now it’s much more involved, it’s a much deeper dive to understand how you’re integrating ESG into your investment process. Igor touched on data service providers. So, they want to understand which data service providers are you using and how you selected them. There are other examples where I’ve seen where they’re asking things about, you know, what the carbon footprint is of the portfolio and how you’re measuring that and what is your ESG objective? What is your risk framework? What is your engagement policy with your portfolio companies? Have you used your proxy votes? Give us some examples as to how you’ve incorporated your ESG factors successfully in your portfolio in the last 12 months.

So, it’s a lot more involved. And as I mentioned before, I think as a non-exec director, it’s my job to sort of ask the questions to the managers before they get them because I think it can be quite daunting sometimes as a manager when you get, you know, several…If you’re not necessarily an ESG fund or you haven’t got an ESG policy and suddenly you get a five to nine-page questionnaire around the ESG due diligence, it can be quite challenging. So, it’s just thinking about these things up front. And if you don’t have an ESG policy, that’s fine, but clearly, be prepared to clearly articulate why you don’t have that. And again, to Igor’s point, focus on what you’re doing at the manager level because maybe you don’t have a product that lends itself well to an ESG strategy. Say, for example, you’re a commodities manager, but what are you doing at the firm level? I think that can be tremendously powerful for managers to have that story sort of tightened up and ready to go.

What Managers Can Do to Prepare for the ODD

Connie: Thank you, Rebecca. I know you touched on the questionnaires. And that’s maybe I’ll look back to Igor and I think to the question that you know on the ODD process in general, you know, it appears to some of the managers, it’s getting more onerous. And I would say if you have anything to share, maybe the top three to five things that you think managers can do to prepare for the ODD and also any common pitfalls to avoid, given that I know you’ve been talking to allocators, investors on a day-to-day basis. So, you’re possibly the best person to share with us here. I think you’re on mute.

Igor: Yeah, thank you, Connie. Definitely, I can share more around this topic. And looking at the ODD process and giving you a flavor, yes, it becomes a bit more interesting. And the reason is, of course, because we want to deliver a good product to our clients and really understand the manager’s business. And this requires looking at the manager from almost like a 360-degree angle, looking at all the processes and understanding their policies and controls in place, what the service providers they’re using in general, what are the fund administrator, what are the lawyers, what are the auditors? And it requires time to get this kind of insight. So, I understand managers have to go through this ODD process sometimes with various companies and various investors, but I think there are a few things they can really do. And because if they would compare to different process in general, the way ODD is run is a global standard and has a similar concept in key themes like valuation, trading, ECP planning, cybersecurity, as mentioned before, is probably now a hot topic more than ever before.

But most importantly, if I can advise managers on that aspect, it’s important to do your own work, be prepared, focus on the areas you know what they were going to ask. It’s sometimes quite obvious of what is valuation, trading. How do you manage your cash control, the cash movement of the fund? How do you interact with the fund administrator? How do you onboard investors? So, these are kind of topics you can really already cover before you go into the ODD and be familiarized with yourself. Another aspect is also being transparent. I think that’s my recommendation. Don’t hold back with information and try to provide the documents and support the ODD expert in their work. I mean, it should be a dialogue between you and the ODD expert from the beginning and not only during when we meet at the discussion, because when we meet, we should already have a dialogue and establish the base we like to explore and to what extent we want to go in certain topics.

And that’s why I think I would recommend to managers at the beginning stage, you should call the ODD expert maybe as much as you need to understand how the process is going to work, what are the questions you might have, and areas you’re going to focus, what documents you like to see. And if this is not clear, it’s very difficult to create a very effective ODD process, considering the time constraints you sometimes have, particularly when we go back to onsite visits. And the fourth point I will highlight is, when you tell your story about your company and about your process, be consistent, because if your policy say A, but you do B, and then your staff represents C, it’s kind of difficult to accept that and to understand how does the company and the processes are really led and controlled and what kind of oversight is provided if the senior people don’t really understand how the process is really properly executed.

And I also have to be honest with the managers, I think here, and they need to understand, yes, ODD will never be near mandate, to be honest. It’s really driven in their first aspect of looking at your performance and analyzing it from an ODD perspective. But I have to highlight that, that ODD can lead to lose a mandate because if you don’t pass your ODD, you can be the best manager in the world with the highest performance in turnover, it will not give you that. The client will concern and probably not give you the mandate. So, it’s important to be ready and, as highlighted with some of the advice I mentioned, to consider that aspect.

Common Pitfalls Managers Should Avoid

And your second question about what are the common pitfalls? It’s very difficult to say sometimes because every manager in my experience is quite individual, the way they run their processes, the way they’re set up. There’s some common processes and controls in place. You can find, particularly, managers set up in Hong Kong, you can see there’s a similar pattern, but still there are differences. And that’s why the risk we sometimes identify can be very different. But if I would summarize it in what we commonly see across the manager is, of course, these days, again, I have to emphasize cybersecurity is a hot topic. It becomes even more now when everybody is working from home. You really want to understand how do you adapt your cybersecurity policy, your data security policy to your business. Do you have high-risk encryption? Do you restrict access to public science? Do you do cybersecurity training, phishing exercise, penetration testing? So, all these topics, even for smaller manager, you need to really think about it. And of course, it’s always driven also by the asset classes, the way private managers run compared to hedge fund manager. Could be different, but still there must be a consideration that we should clearly demonstrate that you have considered all aspects.

Another point is about segregation of duties, particularly for smaller manager when you have the chief operating officer, at the same time the compliance officer. Yes, there could be a conflict of interest, but even for smaller managers, there is an acceptable threshold, I would say. But most importantly, you really need to demonstrate that you separate the investment team and the operations team. So, there should be no overlapping duties and responsibilities. And this can be easily achieved to the right hires, people with experience, and a clear reporting line, which is defined. Another point which we see most of them as a weakness, it’s about the conflict of interest. When you talk about personal account dealing policies, gives them entertainment, use of expert network. There’s still generally a lot of weaknesses around that. And managers are surprised when we picked it up because they say, “Okay. The regulations require as follow.” Of course, as a consultant, we always follow the best practice, which we see in Mercer and what we have established over the years. So, I think that’s always a conflict of interest, and it will be a hot topic, even from a regulatory perspective.

Another point I think I will highlight is about succession planning. Again, it’s probably more applicable for smaller firms to medium your firms, whereas an owner-run firm where the CEO is the same time the owner holds 100% equity stake. A lot of firms probably don’t think about what’s going to happen with equity stake once the CEO becomes incapacitated. Without standing, of course, we understand in all the PPMs, you will have a key man clause, which gives the Mercer the opportunity to redeem out the fund if something happened to the key man. But I think managers have to think about beyond that and understand what will really happen to the owner of the firm and the equity stakes once you become incapacitated because it doesn’t mean you have to close down the firm. Is the ownership equity stake stuck in their estate and you cannot make any decision? There are discussions which the manager should have to understand how to approach that.

As well, cash control. It will and will remain. I think it will always be a hot topic across managers. And you have to have a proper cash control in place, particularly for funds which are administrated internally. There’s no way that this is a topic which will be not scrutinized to the extent that you need to really prove how you access the bank account as the multi-factor of the situation. And at least a dual signature approval, etc. So, all these topics need to be covered. And last but not least, which we always see a kind of a weakness, particularly in an Asian context, but when we think about the fund governance and when we set up a fund, particularly on the hedge fund, and it’s a company setup, from our perspective, we always would expect the independent directors to be on the board. That’s quite important for us to represent the interest of the investors.

And as well, when we look at the private equity setups, definitely if it’s a limited partnership, you have to establish an [inaudible 00:29:55.632]. I think it’s common practice, definitely. Less practice we will see in the context of hedge funds sometimes having majority of independent directors. That’s the best that you can achieve and that’s what investors actually also love. And the last topic I would say is about best execution. I mean, that should not be taken lightly. You need to really demonstrate how you achieve best execution and do you have oversight of independent control functions who really checks that the trader has achieved the goals and follows the order-based policy. So, that’s in a nutshell, I would say, kind of some of the topics I would consider support.

Connie: Thank you, Igor. I think that’s a really full of thoughts for everyone here. I mean, the point that you touch on, the alignment of the interest, the segregation of duties to avoid the conflict of interest, having the board independent. I think these are, for sure, the key factors that managers can take away today when they go through their internal process and what they can do as a best practice, especially if they’re looking to attract the capital from institutional investors, most sophisticated one where you’re trying to, you know, create a longevity relationship with your investors. So, consistency and also transparency. That’s also my two takeaways here. And thank you, Igor, on that part of the ODD.

How to Define ESG Objectives & Benchmarks

And I guess we can flip a little bit on the ESG. It’s a very broad topic and there’s a number of things that we can touch on and we can talk for days about the ESG. So, I guess if maybe, over to Konstantina, just to your point of view, how we can define or maybe narrow the ESG objectives and how we can set the performance benchmarks. I know that there’s not really such a globally affected consistent definition of sustainable ESG investing. And it can mean different things to investors. And the way that managers can adopt it, it’s also differently. So, Konstantina, if I can invite you to share with us, that will be lovely.

Konstantina: Yeah, sure, thank you. As I mentioned before, ESG means different things to different people. And this is also translated on how managers integrate ESG into the governance, into the strategy, into the risk management and investment process, and then at the end, the analytics and the monitoring and reporting to the investors. So, I think it’s commonly accepted that there is no one-size-fits-all for sure either on the objectives or how to integrate the ESG. And different market participants are in different stages of the ESG journey. So, yes, it is hot topic at the moment, but ESG is not new. So, there have been asset managers that they have integrated ESG aspects into the investment decision-making process many years ago and they communicate this. And when we say ESG, there is a tendency to think only the E of it, like the environmental, like carbon emissions. And I know that especially here in APAC, regulators have been focusing more on the E, like Singapore, Hong Kong, Australia. So, in all the communication with the market participants, we see a strong direction towards the E, but there is also the S and the G that they’re equally important. And this should be part of the ESG journey as well.

So, how we implement the objectives. So, there can be small steps before big jumps. It can be positive or negative screening, or it can be a strategic approach of how we incorporate this into the core of the investment management process. As you said, they’re not universally accepted standards, but there are many frameworks out there and there are many popular frameworks that they’re a good first step on standardization of ESG. But yes, there are the frameworks there, but none of the frameworks actually tell you how to implement the E, the S, and the G, or how to report. So, they give you the general direction. So, there’s a lot of room for interpretation, which is a good thing, but also, it’s a challenge itself. And this is how we try to help our clients. I think that relative monitoring and relative objectives are gaining ground. And this also has to do with the reporting at the end of the day, like, how are my investors? Are they asking for more transparency, for more disclosures? What is their level of understanding of ESG? If I give them a number, can they digest the number? Do they know what number means?

So, what I’ve seen over the past two years that I’m largely involved in the ESG reporting and analytics that I see a trend towards relative, which is easier to maintain, easier to understand from the investor’s point of view. But also, the objectives become also more complex. And it comes from investor demand as well, but also from regulatory guidelines, like, for example, the controversies, the reputational risks, stress testing on carbon aspects, physical risks, carbon earnings at risk and all this. So, it becomes a complicated topic that the market participants will have to be prepared to integrate in their processes. Yeah. That’s the topics I would like to highlight on the objectives. Now on the performance side, and performance I think it’s yet to be proven for the ESG label. And especially focusing on the past 12 months and connecting it to the COVID challenges. The past 12 months have not been standard normal conditions and with the ESG as a hot topic as well. I think it’s too early to draw conclusions about the performance of ESG funds versus non-ESG funds and so on. We need a longer history of data under normal market conditions, under market conditions without extreme volatility to be able to draw conclusions around performance.

Market Insights

Connie: Thank you, Konstantina. And I think it was a very interesting part you mentioned about the performance benchmarking. And I think Rebecca and myself, we had a number of calls over the last few months, managers are asking what kind of benchmark they can use to rate certain portfolio companies and maybe the fund itself when they’re doing the internal assessment. And maybe Rebecca, you can share with us, you know, what you’ve been seeing in the market. And also, I recall that there are also manager asking is ESG policy is a nice thing to have? And I guess, Rebecca, you can really share with us on those two points.

Rebecca: Yeah. I think it used to be a nice-to-have. And I think you see one of those tick the box and kind of move on. It has evolved. And as I mentioned beforehand, if you don’t have an ESG policy, just be prepared to clearly articulate why that is. I think Konstantina makes some fantastic points there around the flexibility and what ESG means to different people and different investors. So, you’ll have some investors that maybe they’ve aligned themselves with certain of the UN sustainable development goals. And so maybe they’re looking for a certain type of reporting or a certain type of policy to meet those. Going back to Igor’s earlier point about alignment, that’s still critical here. So, when you’re developing your policy, thinking about what your investors actually want, and there’s this growing belief within the industry around the materiality of sustainability risks and how they can impact investment returns, particularly in the longer term as we struggle, as the societies struggle to deal with things like climate change, lack of water. And then some fact testing tools out there. One of the points that you raised earlier, Connie, was about lack of definitions in the market and so no consistency. And the SASB has done a fantastic job there. I think their materiality matrix is a really, really useful tool for managers to look at when they’re thinking about how they can develop their ESG policy. And there is some regulation, obviously, coming, the taxonomy will help standardize some of those terms. But yes, the policy is no longer a nice-to-have in short.

ESG Tools for Managers

Connie: Thank you, Rebecca. And I think we’re also conscious of the time. And I think the one slight point you touched just now, and it’s kind of aligned with one of the questions that we have here is about, you know, the ESG tools available to the managers, and I guess today, because we have quite a bit of managers who are on the line who are actually Asia-based. And some of the time they might struggle to identify the suitable tools they can use. And maybe, Rebecca and Konstantina, you can share what you’ve been seeing in the market that you think could be potentially a tool that managers here can consider.

Konstantina: Yes, the tools. Yeah. I mean, tools, number one, which is also the biggest challenge of integrating ESG is ESG data. The vendors you’re going to use. There are so many vendors out there using different methodologies, different approaches, focusing on different aspects of ESG. So, it’s about finding the balance between what your objectives are, what you’re trying to achieve or, you know, how would you like to meet your investors reporting needs, the disclosure needs as well, and the right vendor. And combining the vendor again with the framework, as Rebecca said, that different frameworks there that meet different needs, like the SASB framework, framework TC, TCFD, the UNPRI. That’s some of the most popular ones. But again, ESG data, finding the right framework and finding the balance between the reporting needs of the investors. The regulations are coming, for sure, and we have to, you know, keep a forward-looking eye and not just looking at today. And having always in the back of our minds that ESG is ever-evolving. Even for those that they consider to be, you know, ahead of the game, sophisticated ESG players, there’s no static notion when it comes to ESG. It’s so dynamic and we need to be prepared for the next step, even if it’s driven by our investors or even if it’s driven by regulation, or if it’s driven by ESG itself as an asset class as well.

Rebecca: Yeah, I think the regulation is really important. So, the SEC came out with a risk alert in March, and it also intended to create an ESG and climate task force. So, this is coming. And as part of the announcement, I mean, the SEC in March said climate risk and sustainability are critical issues for the investing public and our capital markets, which gives you some idea as to where they are going with this. One of the key things around that is the risk alert in particular was around funds having an ESG policy and not necessarily adhering to that. And that’s where the governance piece remains really, really important in terms of that oversight. Do you have the right people sitting on your ESG or sustainable and responsible investing committee? Do they have the right expertise? I mean, a number of managers are struggling in-house to have people in their teams with ESG expertise. So, do you need to bring someone in externally to help you with that process and then maybe sit on your committee and help you get off the ground in terms of developing your policy and then overseeing that so that you stay on the right side of these regulations?

ESG Takeaways for Managers

Connie: That’s a really good point. I think Rebecca, that’s on the ESG governance, right? That’s not something that we often hear about people talking about that, but when you go through, you know, the ODD process or maybe the dual diligence checklist, you often get asked whether if you have a ESG committee member set up and what’s their kind of background, whether there’s any diversity and inclusion on that one. And I guess possibly just the last question that we’re going to pick from the attendees today, I know there’s a couple of ones coming up also, but the last one I guess is to all the panelists today. We touched on the ODD, we touched on the ESG and maybe just pick your brain, given that your expertise individually. What is your view, should managers engage with investors on the ESG that you think is the best fit? I know that there’s a lot of conversation about that and it could be potentially kind of dragged to brainwashing and what should the managers be, I mean, be careful or like what would you say for them as a takeaway? If I may ask maybe just Igor to start with, followed by Rebecca, and then Konstantina.

Igor: Yeah, sure. I think it comes back to transparency, aligning the common understanding what ESG is. I think looking for the dialogue with them is just important. And I think as Konstantina highlighted, the understanding what ESG stands for and what it should be is very different across investors, across managers. It’s important to find a common understanding and think in that aspect and be also transparent. I mean, also have to explain, so unless you invest in ESG, for this asset class, it’s difficult to achieve ESG scoring or follow the ESG methodology or in complementing our investment process because it’s not a purely equity strategy. It’s a multi-asset strategy with different instruments. So, there are a lot of challenges, I think, which needs to be discussed with the investor. But I think it’s about also demonstrating the investors. Okay. We have it on our radar. We are having active discussions with them. We think about hiring people. We are lining out or we’re developing a roadmap where we want to be in the next five years. So, I think that’s important factors. And again, this is just to emphasize, having the dialogue with investors is most important.

Rebecca: Yeah, yeah, I agree. I think in terms of the alignment and making sure that you’re giving your investors what they need and just being…In terms of your ESG reporting or any statements you’re putting out publicly on your websites about what you’re doing, just make sure that you’re actually doing that. As you saw, the FTC is really, really focused on this. And I think we’re going to see a lot more regulation in this space. So, the golden rule of compliance, just follow your policies and do what you say you’re going to do.

Konstantina: Yeah. My comment would be that ESG is definitely here to stay. As Rebecca said, it used to be a nice-to-have, but not anymore. But then the integration of ESG is not a race. It should be, you know, a step-by-step process. And again, the self-reporting part of it, especially in regions that regulation is not as solid as in Europe, it can be tricky. How do you attract investors? Or what are the requirements of your potential investors and how do you meet those? So, make sure that there is a balance between what you’re doing internally, what you plan to do internally, and how this presents outside your organization. And yeah, make sure that there is consistency and that there is a plan.

Concluding Remarks

Connie: Thank you, all of the panelists today. I think there’s a few really good points and just key takeaways on that and the consistency alignment of interest and be open and engage with active dialogue with your investors and do what you say. I think these are really good points for managers today. Be cautious and also be consistent while you’re kind of doing your pitch. And I do appreciate, Rebecca, Igor, and also Konstantina joining us today. I think you guys have amazing, sharing your knowledge, subject matters in covering the ODD and ESG. And also, again, to everyone who took the time this morning joining with us and listening to us on this particular topic. For some of the questions we didn’t get a chance to address today, again, we will reach out to you individually and we’re happy to also share the context of each of our subject matter experts today. And thank you, everyone, for joining and participating and I wish you guys a very good day. Thank you. Take care.