In a report commissioned by the Norwegian Ministry of Finance to review Norges Bank’s management of the Government Pension Fund Global (GPFG), Inflection Point (IP) seeks to analyse best responsible investment (RI) practices across a number of global asset owners. In conducting their research, IP interviewed 18 asset owner institutions across 13 jurisdictions, and consulted 11 experts.

RI is growing in importance in asset management, with many investors seeking to integrate Environmental, Social and Governance (ESG) considerations into their investment policies and decision-making processes. RI exposes risk factors that may not be identified by traditional investment styles. Through the emergence of new industries, transitions to low-carbon technology, and greater emphasis placed on the United Nations Sustainable Development Goals (SDGs), investors have access to many investment opportunities. There is no “one size fits all” when it comes to RI best practices, considering varying organizational purpose, mandates, size, legislative constraints, and resources. However, IP’s study concludes that size is not a major factor in determining the strength of any given asset owner’s implementation of RI.

The first section of the report examines how the interviewed institutional investors integrate RI in their policies and operations. Though smaller asset owners have greater agility to move money, large universal owners are well-suited to engage companies, industries and regulators to generate systemic change. RI best practices integrate a long-term focus, improving investment culture and performance. ESG integration, company engagement and voting, and collaboration with like-minded peers are all central tools employed by all asset owners interviewed. According to experts, hallmarks of best RI practices include innovation, accountability, clear strategy, portfolio diversity, transparency and commitment.

The second section outlines overarching perspectives of best practices and some of the drivers and expectations on funds behind leading RI initiatives. Strong leadership, a long-term investment horizon, and a belief that ESG strengthens risk management are integral to RI best practices. By adopting a total portfolio approach and building partnerships with peers, investors will be able to commit to a high level of RI integration into their core investment beliefs.

The third section analyses investment issues, the roles of active and passive investment styles, the integration of climate change into investment considerations, and ethical screening. Active management provides greater opportunities to pick stocks, exclude individual securities or sectors, and engage with companies over a shorter time period. Passive management, however, enables engagement on systemic issues over a longer time period, bolstered by a substantial base of assets. Passive investments also enable the creation of benchmarks for the wider industry.

The last section of the report assesses where RI is headed in the next 3-5 years. Driven by stakeholder-demand, regulatory pressures and commercial opportunities, RI is increasingly being mainstreamed with investment. As a result, focus on climate change, and the rise of ESG-enhanced benchmarks, such as “smart beta”, have grown in importance.

This report may be useful for those wishing to gain a comprehensive understanding of RI best practices, and compare them with their own investment beliefs and processes.

1. The dedication of resources to RI leads to improved decision-making, strengthened trust among stakeholders and enhances an organisation’s reputation by exposing risk factors that may not be recognized by traditional investment styles.
2. There is decreased emphasis on central RI teams and sustainability-mandate portfolios, and greater focus on building ESG capability across the entire investment platform. There is a clear trend among asset owners interviewed to let RI teams coordinate, supervise and advise, and then to have other teams run the processes. These efforts are not seen as a cost but as an investment and are viewed as part of well-functioning asset management operations.
   
   
3. Knowledge-building in RI is key for the majority of investors interviewed, who combine formal training with ongoing dialogue and information sharing among the various investment teams. Transparency, communication and reporting are critical for the success and impact of RI. Board continual learning, education and dialogue were also emphasised as important.
4. Large asset owners own a slice of the global economy and often adopt passive approaches, enabling them to engage companies, industries and regulators to drive systemic change on issues that undermine sustainable development. Small asset owners are often more adept at innovating and moving money quickly; they often rely on active management, enabling them to engage with a smaller number of companies on narrowly focused issues.
5. Robust RI practices are driven by leadership from the top, long-term focus, integration of RI into investment beliefs, a total portfolio approach with strengthened risk management, partnerships with peer investors, commitment to engagement, and continuous innovation. A clear majority of funds interviewed said they see RI efforts as contributing to risk management and investment performance, helping to build trust and reputation, properly fulfilling their fiduciary duty.
6. Ethical screening has seen a shift from “where not to invest” to “where to invest and have the ability to influence portfolio companies and markets most,” depicting greater focus on outcomes and alignment with organizational values.
   
7. ESG integration, company engagement and voting, and collaboration with like-minded peers are RI tools that all investors interviewed use. Notably, engagement with portfolio companies should always precede divestment, as divestment means that the investor loses any ability to potentially drive improvement.
8. ESG and RI are seen as sources of innovation which, while specific to each institution, often allow a fund to carry out high quality RI operations which are consistent with their mandates and play to their natural strengths. Common new strategies and approaches include custom RI benchmark index, low carbon smart beta, green bonds, and ESG quant equity.
9. Key international standards providing greater requirements for transparency, RI and ESG integration include UN Global Compact, OECD Principles for Corporate Governance, OECD Guidelines for Multinational Enterprises, and Principles for Responsible Investment.
10. This research is particularly relevant to those wishing to expand their knowledge of RI best practices and compare leading practices with their own investment policies, processes and beliefs.