Manager selection: the next frontier of climate investing?

Nearly a year to date, New York City’s Employee Retirement System conducted a review of its public markets managers. All 45 were asked to submit plans in alignment with the pension fund’s net zero by 2040 goals. 96% passed the alignment test.

The case speaks to a wider trend. As climate investment beliefs undergo their most significant change in decades, manager expectations are too.

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New guidance from the Institutional Investor Group on Climate Change (IIGCC) takes stock of changing climate investment beliefs and their widening interaction with manager selection.

Manager selection

For IIGCC members, the guidance brings into focus growing concerns over climate-related manager alignment for asset owners. It recommends embedding climate stewardship expectations in manager selection – and where feasible – mandates.

“Selecting external fund managers is one of the most influential stewardship levers for asset owners, an opportunity to embed strong climate stewardship”, the document reads.

The guidance itself has been many months in the making – a culmination of extensive discussions with members across the manager-owner spectrum.

“We definitely feel that the guidance is timely and it speaks to the present moment”, says Patrick McNamara, IIGCC’s senior specialist for net zero stewardship.

McNamara reckons asset owners are, more than ever before, seeking alignment and making selection calls based on their climate investment beliefs.

In that regard, few asset owners have not hesitated to vote with their feet. Last year, Dutch pension investor PGGM decided against renewing mandates with BlackRock and LGIM. The move came months after the UK’s People’s Pension moved £28bn from investments with State Street. In both cases, sustainability and climate alignment were cited as causes.

In the pursuit of alignment, the IIGCC contends manager selection is an underutilised resource. “Asset owners see the opportunity to tailor mandates as an opportunity to lay out and stretch expectations”, explains McNamara.

Benefits he says, flow both ways. For managers too, embedding climate expectations in selection criteria and mandates brings consistency. “If asset owners can be more consistent, it increases the likelihood of expectations being embedded”, he adds.

Signalling alignment

The guidance proposes a deliberately tailored search for alignment – reflected in each step of the selection process.

In RFP and screening for instance, it suggests seeking clarifications around fee structures and stewardship. In screening and due diligence, indicators can be less straightforward.

NZAM membership for instance the IIGCC says, could signal organisational buy-in asset owners are looking for. “We’ve seen broadly a positive reaction to the relaunch [of NZAM]”, says McNamara.

The guidance issues caution here. “Such membership is best considered as one factor within a broader assessment that also considers a manager’s strategy, governance, and stewardship approach, among others”, it notes.

The guidance recommends asset owners weigh investment exclusions, voting records, lobbying activities and on-site interviews among others. “Red flags may include evasive answers, an inability to provide examples, or discordant statements in public interviews”, it contends.

Mandate design

Integrating climate expectations into mandates has notable precedent. “The first thing that people refer back to is the ICGN model mandate”, explains McNamara.

The model mandate – first issued in 2012 and revised ten years later – has increasingly reflected the growing interactions between fiduciary duty, sustainable investment beliefs and manager oversight.

It includes draft clauses to reflect a wide range of sustainable investment beliefs – from exclusions and biodiversity loss to voting and stewardship.

With a new era in climate investing plans underway, the ICGN model mandate could surge in popularity. Alongside the IIGCC’s latest advice, it could bring manager selection and mandates to the forefront of climate investing.

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