Almost all investment managers we have researched have an answer to how ESG is integrated into their investment process. However, we have observed considerable differences in approaches. Some use third party research, while others conduct their own assessment. Some integrate ESG through valuation assumptions, while others prefer to use a more qualitative approach. And, interestingly, we found that some fund managers without ESG directly attached to their product are doing more in practice than some that claim to be leaders in this space.

But this article is not about how ESG is managed in an investment portfolio, it is about what investment providers, such as investment managers and consultants, do themselves. ESG discussions in investments are often focused on what is held within the portfolio. But what about the company that manages or advises you on your investments? Do they live up to what they expect from others?

We definitely think they should and highlight a few areas that you may want to consider as an investor. We also give you six simple questions that you may want to ask to find out more about what your provider does in practice.

Carbon footprint: Is it really a low carbon investment strategy if the investment manager is constantly flying across the ditch to see you? Airline travel is an obvious place to start, in our view. Carbon emissions can be easily offset these days, so you should expect an investment manager with ESG credentials to do it when they have to fly.

Waste: The 3 R’s, reduce, reuse, recycle are obvious areas for improvements. Printed presentations for a portfolio update are an outdated way to share information, for example. Everywhere we look there is a screen now. A TV in the meeting room, a tablet on the desk and a phone in everyone’s pocket. All of these devices are capable of presenting information, so it should not be that hard to do paperless presentations.

Equal pay: Compared to other industries, gender and ethnic diversity is still lacking in the investment industry, especially when it comes to the key decision makers. We hope that this will change over time. But unequal pay for the same level of responsibility is outright wrong and should be fixed now. In other parts of the world large organisations have started to disclose data on their gender pay gap. We would like to see the same happen closer to home, including in the investment industry. More transparency and information should help to make sure no one can ignore this important issue.

Community focus: COVID-19 has demonstrated that a business does not operate in isolation. We all profit from the stability, protection, and support that we receive from our government and our communities. Therefore, we believe that we have a responsibility to give something back from time to time as well. There are several ways in which this can be done, including allowing staff paid workdays to volunteer, matching staff’s charitable donations or making donations directly on behalf of the company. Needless to say that asking the government for a subsidy for a highly paid portfolio manager or top executive does not fit well with community focus, in our view.

Board: It is commonly accepted that independent directors on the board of a company provide an additional layer of oversight and a different perspective. More broadly, it is reasonable to expect a diverse group of individuals on the board. Although many investment managers and consultants will consider this in their assessment of governance for the companies they research, not all have an independent voice or diversity on their own board of directors.

Alignment of interests: The bonuses of investment teams should be tied to the long-term objectives of the portfolio, be it performance or, if it is an ESG strategy, ESG integration. Aligning remuneration only to the growth or profits of their own business, however, may result in incentives that are not aligned with clients’ goals. Furthermore, you have to be wary of conflicts of interest depending on the investment provider. For example, short term performance fees could result in a manager taking excess risk, or there might be incentives to trade frequently to incur higher commissions.

The main job of an investment manager or consultant is to produce good performance. But rather than keeping the magnifying glass solely on the investments, we suggest that you turn your attention every once in a while to the company managing or advising you on your money. We believe that providers that takes ESG seriously in running their own company are more likely to also implement better ESG considerations in their investment activities.

Here are a few questions you may want to ask your provider the next time they present their ESG credentials:

• Do you offset your carbon footprint from air travel?
• Are you encouraging staff to reduce printing?
• Do you have policies for equal pay in place?
• Does your organisation support charitable work in a substantial way?
• How many independent directors do you have on your board?
• Is your bonus linked to investment performance or the profitability of the company?

Asking these questions should not be seen as policing issues, it is about encouraging positive change. At Makao Investments, we easily admit that we are far from perfect ourselves but we hope that we are moving in the right direction. What are the companies doing that manage or advise you on your investments?