Asset Managers, Corporate Funds, Defined Benefit, Endowments/Foundations, ESG/SRI, Governance, Institutional Investors, Pension Funds, Public Funds

Sexual Harassment is Institutions’ Top Emerging Due Diligence Target: IA Survey

Institutional investors surveyed by IA recently on the importance they attach to four ascendant asset-manager engagement due-diligence criteria indicated that they place the most importance on managers’ records on sexual harassment, followed in descending order of importance by their records on environmental, social and governance (ESG), cybersecurity and diversity.

In response to a brief thought leadership paper titled New Rules of Engagement for Asset Managers, published, in July, by Charnley & Rostvold, a consultant to asset managers, IA surveyed a cross-section of institutional investor types, over the four weeks spanning July 19 – August 22, on the weight they attach to certain asset manager due-diligence criteria that are purportedly growing in importance. The criteria were ESG, cybersecurity, diversity and sexual harassment.

“As markets evolve, new criteria continue to emerge. In this increasingly competitive environment, an asset manager’s rankings on more recent criteria can make all the difference between winning a mandate or not,” asserted Christine Rostvold, the paper’s author and a partner at the San Juan Capistrano, Calif-based Charnley & Rostvold.

According to the paper, “It takes time and expense to put new policies, practices and strategies in place to address new and emerging investors’ criteria. Those asset managers who monitor the changing interests and requirements of investors, and who can show progress and evidence that they are evolving their firms to address these changes, will have the highest and broadest opportunities to win and keep mandates in the future.”

When asked in IA’s survey to rank on a scale of 1 – 4 (with 1 representing very high importance and 4 representing totally unimportant) the referenced new manager engagement criteria, and the level to which they are embraced by their institutions in their evaluation of asset managers, respondents gave sexual harassment an average score of 1.86; ESG 2.57; cybersecurity 2.69; and diversity 2.75.

“I’m a bit surprised how low cybersecurity was ranked,” Rostvold confessed when contacted by phone regarding the survey’s findings.  She speculated that perhaps asset owners are quietly confident that the issue is of sufficient critical importance to regulators and that asset managers are on top of the challenge. “They may perceive cybersecurity as almost a given now,” she observed.

She added that the results beg the question: ‘What criteria do institutions find important?’ given that none of the results of the survey’s criteria rankings rises to the top quartile. “It’s interesting that these criteria are of relatively low importance now, but what about going forward? There’s an assumption that these criteria will grow in importance among asset owners over time,” Rostvold said. She added that recently one of her firm’s asset management clients was excluded from a public pension plan manager search based on its inadequate diversity.  “Given that diversity was ranked last by the respondents in general, it would be interesting to see the results parsed by type of fund,” she said. She declined to name the asset manager that was eliminated from the manager search or the public fund involved.

Rostvold noted that the survey’s other engagement criteria are ascendant and that managers should expect to see increasing intolerance by asset owners, versus in the past, regarding non-compliance.

Manager engagement criteria

The criteria institutional investors use for selecting asset managers have expanded over the years—from the four P’s (Philosophy, Process, People, Performance) to comprehensive due diligence that covers the waterfront, according to the paper. The criteria encompass many areas, including overall organization—business management, ownership, infrastructure and professional continuity; investments—team, capabilities, research, risk management, trading; client relationships—client types served, client retention, credentials of relationship management professionals, access to investment professionals, communication and reporting, intellectual capital; sales and marketing—target markets; size, experience and continuity of distribution professionals; consultant relationships; social media presence;  performance—relative to benchmark(s) and peers, attribution, consistency; and fees—willingness to negotiate. The weighting of each criterion varies among different types of investors.

Regarding emerging or ascendant manager-engagement criteria, the paper explained that today ESG criteria encompasses environmental (climate change, natural resources, pollution and waste), social (human capital, product liability, social opportunities) and governance (corporate governance and behavior). Specific areas of scrutiny include: whether a manager has a formal ESG policy, incorporates ESG factors into research, has stand-alone ESG investment strategies, votes proxies responsibly, engages with companies on ESG issues, and is a signatory of the PRI (Principles for Responsible Investment).

Concerning cybersecurity, the paper noted that addressing new cybersecurity regulations and increasing cyber threats is a significant challenge for asset managers.  To protect themselves, many asset management firms have recently revised their regulatory cybersecurity disclosures adding disclaimers about data protection limitations.

Information on diversity statistics among asset management firms is limited, the paper noted, adding that it is becoming a key criterion in manager selection.

The #MeToo movement has triggered growing due diligence on asset managers’ harassment policies and training, as well as cultural stances, the paper noted.  Institutional investors and consultants are using a variety of avenues to assess managers on this criterion, including questions on requests for proposals (RFPs) and due diligence questionnaires (DDQs), in-person interviews, social media searches, public court filings and even private investigators.

Survey participants

Thirty five institutions based in the U.S. and Canada (2) responded to IA’s questionnaire. Their investment assets ranged from less than $250 million to in excess of $100 billion. Respondents included university endowment funds, hospital endowments, non-profit foundations, public retirement funds and corporate funds.

Editor’s note: a deeper dive into the findings of the survey, with responses presented by type of institution and AUM will be presented in the next (fall) edition of IA’s quarterly magazine, which is due in mid-October

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