12.5 Manager Selection, Client Types, and Measuring ESG Performance
Key Takeaways
Asset owners and consultants use requests for proposal (RFPs) to test a manager's ESG policy and governance, resources, evidence that ESG changes decisions, stewardship record, reporting and controversy history.
Client type shapes strategy: defined benefit pensions and insurers focus on long-term risk and liabilities, endowments and foundations on mission alignment, sovereign funds on intergenerational stewardship, and retail and wealth clients on stated preferences and values.
The IIRC's Integrated Reporting Framework describes value creation across six capitals: financial, manufactured, intellectual, human, social and relationship, and natural.
Measuring ESG investment performance is hard because data and methods differ by strategy and asset class, financial and sustainability outcomes must be separated, and attribution of ESG effects is imprecise.
CFA Institute's voluntary Global ESG Disclosure Standards for Investment Products, issued in November 2021, require clear disclosure of a product's ESG approaches, such as ESG integration, exclusions, best-in-class, thematic focus, impact objectives and stewardship.
12.5 Manager Selection, Client Types, and Measuring ESG Performance
Curriculum Focus: Explain the most common features of ESG investing that asset owners and intermediaries (including pension consultants and fund selectors) seek through RFP and selection processes; explain how different client types and objectives influence the ESG strategy selected; and explain forms of integrated ESG reporting and investment reviews, and the challenges in measuring, reporting and analyzing ESG-related investment performance across approaches and asset classes.
Section 12.1 showed how mandates and investment policy statements codify ESG requirements. This section looks at the other side of the relationship: how asset owners choose managers, how their own characteristics shape what they ask for, and how they judge whether the manager delivered.
1. What Asset Owners and Consultants Look For in RFPs
When an asset owner tenders a mandate, it (often with an investment consultant or fund selector) issues a request for proposal (RFP) and follows up with due diligence meetings. Common ESG questions cover:
| Area | What evaluators ask for | Evidence that impresses |
|---|---|---|
| Policy and governance | Responsible investment policy; board or committee oversight; signatory status (PRI, stewardship codes) | Policy applied firm-wide, with named accountable executives |
| Resources | Size and expertise of ESG and stewardship teams; data sources | Specialists embedded in investment teams, not isolated |
| Integration | How ESG enters research, valuation and portfolio construction | Case studies where ESG findings changed forecasts, weights or decisions |
| Stewardship | Engagement priorities, escalation, voting record, securities-lending recall | Outcomes tracked against objectives; votes explained |
| Product classification and claims | SFDR or SDR status, fund-name compliance, alignment of marketing with process | Consistency between documents, holdings and reporting |
| Reporting | Portfolio ESG metrics, carbon data, stewardship reports | Client-specific, assured or verifiable data |
| Controversies and conduct | Past greenwashing findings, regulatory actions, conflicts of interest | Transparent explanation and remediation |
Consultants often assign managers internal ESG ratings, and a weak score can exclude a manager from shortlists (section 2.2). After appointment, the investment management agreement and any side letters record the ESG requirements, and ongoing monitoring tests whether the manager continues to meet them.
2. How Client Types Shape ESG Strategy
| Client type | Typical objectives and constraints | Strategies often preferred |
|---|---|---|
| Defined benefit pension fund | Long-dated liabilities; fiduciary duty; often a universal owner | ESG integration, stewardship, climate targets, decarbonized benchmarks |
| Defined contribution scheme and retail investors | Member and client preferences; default-fund design; MiFID II preference rules in the EU | Labelled funds, exclusions, ESG-tilted index funds |
| Insurer | Asset-liability matching; solvency capital rules; climate risk on both sides of the balance sheet | Integration in fixed income, green and social bonds, climate scenario analysis |
| Endowment and foundation | Perpetual horizon; mission alignment | Exclusions linked to mission, mission-related and program-related investing, impact |
| Sovereign wealth fund | Intergenerational savings; national ethical guidelines | Norms-based exclusions, stewardship, long-horizon thematic allocations |
| Family office and high-net-worth investor | Personal values and legacy; flexibility | Thematic and impact investing, customized screens, direct indexing |
| Faith-based investor | Religious principles | Values-based exclusions, engagement on social issues (section 5.5) |
The same ESG objective can therefore lead to different strategies: a pension fund worried about climate risk may choose integration and engagement, while a foundation with an environmental mission may choose exclusions and impact investments.
3. Integrated Reporting and Investment Reviews
Integrated reporting connects financial and sustainability information in one account of how an organization creates value. The IIRC's International Integrated Reporting Framework (now maintained by the IFRS Foundation) describes value creation across six capitals: financial, manufactured, intellectual, human, social and relationship, and natural. For investment products, the equivalent is an integrated investment review that reports financial performance alongside ESG characteristics, stewardship activity and, where relevant, impact—showing how they relate rather than presenting them in separate documents.
4. Challenges in Measuring ESG-Related Investment Performance
- Different approaches need different measures. An exclusion fund is judged on compliance and tracking error, an integration fund on risk-adjusted returns and decision evidence, a thematic fund on revenue exposure to the theme, and an impact fund on outcomes and additionality. One scorecard cannot serve all of them.
- Asset-class differences. Carbon metrics for sovereign bonds use different denominators from those for companies; private-market data are sparse and estimated; derivatives and short positions complicate look-through.
- Attribution. Separating the return effect of ESG decisions from sector, style and stock-specific effects is imprecise; ESG tilts often overlap with quality and size factors (section 11.1).
- Data quality and timing. Scores change with methodology updates, and corporate data arrive with long lags.
- Benchmarks. Comparing an ESG portfolio with a conventional index mixes the effect of the constraints with manager skill; ESG benchmarks reduce that problem but depend on the index provider's choices.
- Financial versus sustainability outcomes. Investors must report both without implying that one proves the other.
CFA Institute's Global ESG Disclosure Standards for Investment Products
To make products comparable, CFA Institute issued voluntary Global ESG Disclosure Standards for Investment Products in November 2021. They do not prescribe an ESG strategy; they require clear, complete disclosure of how a product uses ESG approaches—ESG integration, ESG-related exclusions, best-in-class, thematic focus, impact objectives and stewardship—and allow an independent examination of the disclosures. Combined with GIPS for performance (section 12.4), they give asset owners a consistent basis for comparing managers.
In an RFP for an actively managed equity mandate, which evidence would best show that a manager genuinely integrates ESG analysis?
A statement that the firm is a PRI signatory and has published a firm-wide responsible investment policy
Documented examples in which ESG findings changed earnings forecasts, valuations or position sizes, with the decisions recorded
A screenshot of the portfolio's average third-party ESG rating compared with the benchmark at the latest quarter end
A marketing brochure describing the firm's long history of commitment to sustainable investing
A defined benefit pension fund with long-dated liabilities wants to manage climate risk across its whole portfolio. Which strategy mix best fits this client type?
ESG integration and stewardship across its managers, supported by climate targets and scenario analysis
A concentrated allocation to a single clean-energy thematic fund, replacing the rest of the portfolio
Exclusion of all sectors with any greenhouse gas emissions, regardless of the effect on diversification
No action, because fiduciary duty prevents pension funds from considering climate-related risks
What is the main purpose of CFA Institute's Global ESG Disclosure Standards for Investment Products?
To set minimum ESG ratings that a product must reach before it can be marketed as sustainable
To replace the GIPS standards as the method for calculating and presenting investment returns
To classify products into Article 6, Article 8 and Article 9 categories for EU regulators
To require clear disclosure of how a product uses ESG approaches, so investors can compare products
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