Aon has developed a ratings system to more closely scrutinize how fund managers integrate environmental, social and governance issues into their investment strategies.

The system begins with a proprietary questionnaire, followed by an examination of the manager’s responsible investing policy, should one exist, as well as its active ownership actions, stewardship policies and its ability to demonstrate how it’s previously applied the policies in practice.

After the investigation is completed, Aon awards a rating, which is then subject to peer review, as well as potential changes as further developments in the integration of ESG issues broaden within the investment landscape. The assessment is consistent with the United Nation’s principles for responsible investment framework, according to Aon.

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“At this point, it’s a qualitative system so it relies a lot on our relationships with our buy-rated managers and we’re applying the same standards across the board. So we’re applying the same things whether it’s a global strategy or a regional strategy,” says Alistair McKissack, a London, England-based senior investment consultant at Aon. 

The ratings are on a scale of one to four, with a rating of one meaning the fund management team is either unaware or unconcerned with the issues and hasn’t taken material steps to address them within the portfolio. For a rating of two, the team is aware of the issues and has taken some steps to address them. To receive a rating of three, the team’s awareness is above average regarding ESG risks within its investment strategy and is taking key steps to evaluate and mitigate them. And for a rank of four, the team is demonstrating a high awareness of all known and financially material risks, showing they have an ongoing process to identify, evaluate and potentially mitigate the risks across the entire portfolio.

“If you look back, we’ve always encouraged our clients to take a long-term view on investing and, I guess, if there’s been an area of ESG focus in the past, it’s been much more on governance. So things like voter participation, executive pay, board composition,” says McKissack.

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Now, he’s seeing more institutional investors keen to expand their understanding of how the environmental and social aspects can materially affect their investments.

“I think everyone is more aware of what’s going on in terms of the social side of things,” says McKissack. “If companies are doing something they shouldn’t be doing in a far-flung country, it very quickly becomes global news and their reputation becomes very high profile. But it’s probably the environmental aspect that’s really taken off, and that’s just because of what we’ve seen happening in the world and the focus there. So I think those issues will come more to the fore and in terms of investors.”

As well, McKissack says trustees and other pension stakeholders are feeling more pressure from regulators to know where they stand on dealing with ESG issues, particularly in Britain. “The whole profile is going up and the expectations are going up that they’re able to say what they’re doing about these risks, and to try to articulate that,” he says. “And the ratings are very much to try to support the clients in terms of knowing where they are with their portfolio and where they might make improvements.”

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Here in Canada, institutional investors are also focusing on better understanding how investment managers incorporate responsible investing into their processes, says Mark Chow, a Toronto-based associate partner at Aon.

“The difficulty has been that everyone’s definition of responsible investing or ESG is a little bit different. And that hasn’t been standardized — and I’m not sure it’s easily standardized either. But the system and the tools that we’re using, and the information that we’re going to be providing, is going to allow plans to make more informed decisions.”

As well, regulators are showing they want to know where pension plans and other institutional investors stand with regards to integrating ESG, says Chow. While this type of disclosure could be as simple as a pension plan relating that it leaves such considerations up to a third-party investment manager, it’s an increasingly scrutinized area and is only likely to be more so in future, he adds.

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