The benefits of OCIO and ESG Integration
Why OCIO is more crucial than ever before
Back in the 80’s, prudent institutional investors with a legal duty to act on behalf of stakeholders’ - not the wider world’s - best interests, believed they should ignore environmental, social and governance (ESG) factors. Not anymore. Quantitative research indicates that ESG factors impact security prices. As ESG factors continue to grow in prominence, efficient and proactive management of the investment portfolio is more crucial than ever before. This is especially true today, when investors are challenged by high market volatility, political uncertainty and regulatory constraints.
At its core, an Outsourced Chief Investment Officer (OCIO), is a governance solution. Decisions need to be made at every stage of the investment process, from putting investments in place to monitoring and managing the portfolio on an ongoing basis. By selecting the right OCIO partner, Investment Committees are, in our opinion, better able to do the following in order to improve their investment outcomes:
- Identify investment opportunities
- Proactively manage risks
- Comply with regulatory developments
It is important to recognize where the opportunities or risks will be when considering ESG factors. The intersection of ESG and OCIO can provide Investment Committees a richness of information and reporting to identify issues driven by risk mitigation, provide return maximisation and comply with regulatory changes as well as align with an organization’s culture and beliefs.
A refined and integrated approach to ESG
OCIO is about using the expertise of the chosen provider and making the most of their investment proficiency. This includes understanding their processes - including how they are capturing and utilizing ESG factors. By hiring an OCIO who acts as an extension of the organization’s own resources and preferences, Investment Committees can improve the likelihood of achieving their overall objectives - both in performance and in ESG integration.
Whilst ESG factors do impact security prices, we believe they do not have to mean sacrificing performance. But not all ESG factors are material which makes it even more important to add robust ESG research and analysis as part of your wish list for an OCIO provider.
OCIO clients can benefit from a provider who has a holistic approach to ESG integration across business and culture, rather than it being a separate consideration or afterthought. We believe the following are the best practices and considerations that Investment Committees can potentially benefit from when OCIO and ESG are integrated.
Manager evaluations: Both a sound awareness of ESG factors and a robust process are essential for responsible investing. A robust process can deliver strong investment returns, reduce risk, and can help meet objectives over the long term–as can establishing a dedicated ESG rank for managers’ investment strategies. These ESG ranks are a qualitative assessment of how well active managers understand the impact of ESG factors on short and long-term security price evolution, portfolio-level risk and the return profile of the portfolio. This evaluation considers the asset class, region and industry and how their approach to ESG is evolving over time.
Screening: A robust screening policy and procedure can help ensure that pooled funds for investors avoid investing in companies involved in controversial production, such as tobacco and firearms. A key part of the screening process is the creation of an exclusion list and reviewing it quarterly.
Bespoke ESG strategies: In addition to incorporating ESG considerations in all funds, an OCIO provider can build bespoke ESG strategies. These strategies can create innovative, proprietary methodologies and tools to support advanced ESG investors in pushing boundaries, allowing continual delivery on fiduciary responsibilities.
Moving away from a traditional model: Better outcomes for organizations
In today’s investment landscape, we believe the traditional model of investing is sub-optimal. This older approach uses a static asset allocation, following advice from consultants and it often can take between 12-18 months for changes to be proposed, agreed and implemented within the investment portfolio. An OCIO partner can take a different approach and incorporate responsible investing in the investment manager evaluation process, portfolio management and advisory functions. It includes closely monitoring and managing the portfolio in real-time. In addition to considering ESG factors within pooled funds, having a dedicated team that works with clients to consider these factors in conjunction to the overall objectives of the organization is crucial in managing long-term opportunities and risk.
The bottom line
An OCIO makes the most of the underlying investment managers, understanding and being comfortable with the process adopted by each manager. The focus on ESG is only likely to increase in the coming years and choosing an OCIO partner who fully embeds ESG within its investment process is a positive step to prepare for an ever-changing world.
An OCIO can provide greater governance, transparency and consistency for those who want to improve the outcomes for their organization and, ultimately, for the stakeholders they represent. Keeping pace with continually evolving markets, regulatory obligations, and administrative tasks is challenging and resource intensive. The right OCIO partner will help reduce the burden, letting institutional investors focus on the areas that matter most to their organization.