1. Socially Responsible Investing 101 for Asset Managers
Isabel Dische, Michael Littenberg and Melissa Bender October 26, 2017

2. Polling Question #1 Are you: An asset owner An asset manager
A consultant/other

3. ESG Factors – An Overview
Common ESG Factors
Frequently Asked Questions Is ESG integration consistent with fiduciary duties to investors? Is there a difference between ESG integration and ethical investing? What factors should we focus on?

4. Polling Question #2
Are you receiving pressure from asset owners or stakeholders to implement an ESG program?
Yes No
Don’t Know

5. Reconciling ESG Integration with Fiduciary Duties
Regulators have begun to clarify that regulatory frameworks do not prohibit ESG integration
DOL Interpretative Bulletin :
“[P]lan fiduciaries should appropriately consider factors that potentially influence risk and return. Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
Other regulators have articulated similar views: IRS (2015); UK Pensions Regulator’s Defined Contribution Code (2016); South Africa: Amendment to the Pension Funds Act (2011)

6. Expectations of Asset Owners
Historically:
Exclusionary screens
Does a manager have policies?
Expectations are rising:
How is ESG integrated into day-to-day investment decisions and asset management
What issues is a manager focused on?
What data sources do they use?
How is ESG incorporated into investment decisions?
How are ESG risks monitored?
How does manager engage with portfolio companies?
More detailed reporting
Link ESG performance to manager’s incentives

7. Pre-investment Considerations
Is manager aligned with asset owner’s ESG policy
Assess manager’s ESG policies and practices for identifying and managing ESG risks and opportunities
Understand if/how a manager influences and supports its portfolio companies’ management of ESG risks and pursuit of ESG opportunities
What is manager’s approach to voting and engagement?
Assess how a manager will support the asset owner’s monitoring of ESG approach
Assess the manager’s approach to handling and disclosing ESG issues at the manager- and portfolio company-level
How coordinated and integrated are the manager’s ESG efforts?

8. Post-investment Asset Owner Considerations
Confirm manager is acting in a manner consistent with agreed upon ESG approach
Understand ESG-related developments applicable to investment
Remain informed of ESG-related events in the portfolio
Assess if manager and investment incidents are consistent with described ESG approach

9. How Asset Owners Use ESG Data
Inform risk and return potential
Evaluate management – e.g., ESG as a proxy for management quality
Engage with companies and inform proxy voting
Shareholder proposals
Engaging with management
Develop customized portfolio reflecting asset owner’s specific concerns

10. Data Challenges for Asset Owners
Inconsistent formats; benchmarking
Comparability – need standardized, comparable, sector-based metrics that are consistently and comparably defined and calculated
e.g., Global Reporting Initiative (GRI) are not necessarily comparable across industries and sectors
Availability - data is often buried in regulatory filings, included with other information, or simply not disclosed
Disclosure may be inadequate / boilerplate
Timeliness – need to be able to integrate ESG with financial and operational data
Reliability
Need for clear conclusions – what are the strategic, competitive and/or financial implications of ESG data?
Internal capabilities and costs

11. Do you currently consider ESG factors in your investment decisions?
Polling Question #3
Do you currently consider ESG factors in your investment decisions?
Yes No
Don’t Know

12. Approaches to Integrating ESG Factors
Pre-Investment
Exclusionary screening
General ESG integration/risk assessment
Thematic investing
Inclusionary screening
Post-Investment
Ongoing monitoring/ assessment
Engagement
Divestment

13. Polling Question #4 Do you currently have an ESG program? Yes
No, but in process or contemplated No
Don’t Know

14. Elements of an ESG Program
ESG policy
Assessment, monitoring and engagement procedures
Training
Internal accountability, monitoring and KPIs
Communication

15. Guidance for Private Equity Investors
BVCA Responsible Investment Toolkit Guidance for: House level Pre-investment phase Hold period Exit phase
PEGCC Guidelines
Consider environmental, public health, safety, and social issues associated with target companies when evaluating whether to invest as well as during ownership.
Seek to be accessible to, and engage with, relevant stakeholders.
Seek to grow and improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders.
Seek to use governance structures that provide appropriate levels of oversight in the areas of audit, risk management and potential conflicts of interest and to implement compensation and other policies that align the interests of owners and management.
Remain committed to compliance with applicable national, state, and local labor laws in the countries in which they invest; support the payment of competitive wages and benefits to employees; provide a safe and healthy workplace in conformance with national and local law; and, consistent with applicable law, respect the rights of employees to decide whether or not to join a union and engage in collective bargaining.
Maintain strict policies that prohibit bribery and other improper payments to public officials.
Respect the human rights of those affected by their investment activities and seek to confirm that their investments do not flow to companies that utilize child or forced labor or maintain discriminatory policies.
Provide timely information to their limited partners on the matters addressed herein, and work to foster transparency about their activities.
Encourage their portfolio companies to advance these same principles in a way which is consistent with their fiduciary duties.

16. No, but in process or contemplated
Polling Question #5
Are You a PRI Member?
Yes
No, but in process or contemplated No
Don’t Know
Never heard of it!

17. PRI – An Overview
The Six Principles
Consistent with our fiduciary responsibilities, we commit to the following:
We will incorporate ESG issues into investment analysis and decision-making processes
We will be active owners and incorporate ESG issues into our ownership policies and practices
We will seek appropriate disclosure on ESG issues by the entities in which we invest
We will promote acceptance and implementation of the Principles within the investment industry
We will work together to enhance our effectiveness in implementing the Principles
We will each report on our activities and progress towards implementing the Principles
An investor initiative in partnership with UNEP Finance Initiative and the UN Global Compact
1,700 signatories, representing ≈ 1/3 of global private capital
Signatories required to publicly report on responsible investment activity

18. Implementing the Six Principles
We will incorporate ESG issues into investment analysis and
decision-making processes
We will be active owners and incorporate ESG issues into our
ownership policies and practices
We will seek appropriate disclosure on ESG issues by the entities in which we invest
We will promote acceptance and
implementation of the Principles within the investment industry
We will work together to
enhance our effectiveness in
implementing the Principles
We will each report on our activities and progress towards
Address ESG issues in investment policy statements
Support development of ESG-related tools, metrics, and analyses
Assess the capabilities of internal investment managers to incorporate ESG issues
Assess the capabilities of external investment managers to incorporate ESG issues
Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis
Encourage academic and other research on this theme
Advocate ESG training for investment professionals
Develop and disclose an active ownership policy consistent with the Principles
Exercise voting rights or monitor compliance with voting policy (if outsourced)
Develop an engagement capability (either directly or through outsourcing)
Participate in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights)
File shareholder resolutions consistent with long-term ESG considerations
Engage with companies on ESG issues
Participate in collaborative engagement initiatives
Ask investment managers to undertake and report on ESG- related engagement
Ask for standardized reporting on ESG issues (using tools such as the GRI)
Ask for ESG issues to be integrated within annual financial reports
Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact)
Support shareholder initiatives and resolutions promoting ESG disclosure
Include Principles- related requirements in RFPs
Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure investment management processes reflect long- term time horizons when appropriate)
Communicate ESG expectations to investment service providers
Revisit relationships with service providers that fail to meet ESG expectations
Support the development of tools for benchmarking ESG integration
Support regulatory or policy developments that enable implementation of the Principles
Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning
Collectively address relevant emerging issues
Develop or support appropriate collaborative initiatives
Disclose how ESG issues are integrated within investment practices
Disclose active ownership activities (voting, engagement, and/or policy dialogue)
Disclose what is required from service providers in relation to the Principles
Communicate with beneficiaries about ESG issues and the Principles
Report on progress and/or achievements relating to the Principles using a ‘Comply or Explain’ approach
Seek to determine the impact of the Principles
Make use of reporting to raise awareness among a broader group of stakeholders

19. Specialized Policy Networks and Guidelines
Climate Change/Environment
Ceres Investor Network on Climate Risk (INCR)
advances leading investment practices, corporate engagement strategies and policy solutions to build an equitable, sustainable global economy and planet
CDP (formerly Carbon Disclosure Project)
runs a global disclosure system that enables companies and other entities to measure and manage their environmental impacts; maintains self-reported environmental data
Institutional Investors Group on Climate Change (IIGCC)
provides investors with a collaborative platform to encourage public policies, investment practices, and corporate behavior that address long-term risks and opportunities associated with climate change

20. Specialized Policy Networks and Guidelines
Sustainability
The Forum for Sustainable and Responsible Investment (US SIF)
seeks to shift investment practices towards sustainability
Governance
International Corporate Governance Network (ICGN)
promotes effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies

21. Polling Question #6 Has your firm adopted a written ESG policy?
Yes, available on our website
Yes, available to assets owners
Yes, internal policy only
Work in progress
Don’t know No

22. ESG Policies and Reporting
Many asset owners and investment managers have adopted policies and make them available on their website
Availability of policies for public review is more prevalent among large asset owners and private equity funds
Hedge fund ESG policies are less common but are an area of increasing focus
Standalone annual ESG reports made available to investors and/or public are becoming more common

23. Polling Question #7 Does your firm prepare reporting on ESG matters?
Yes, external to public
Yes, shared with asset owners
Yes, internal only
Work in progress No

24. ESG Policies -- Key Features
Purpose
Typically defines firm’s overall ESG approach
Reference to signatory status to PRI or participation in other relevant networks/frameworks
Scope of policy and activities to which the policy applies
Roles of firm professionals including description of committees
ESG goals and manner of implementation
Diligence, monitoring, asset owner and stakeholder transparency
Performance standards
Description of methodology used to assess ESG risks and opportunities

25. Polling Question #8
Has your firm invested in or formed a fund pursuing a dedicated SRI, ESG or impact strategy?
Yes
Considering No

26. SRI/ESG/Impact Fund Formation Trends
Mutual funds
ETFs
Private equity
Impact-focused managers/separate account strategies

27. About Isabel Dische Isabel Dische is a partner at Ropes & Gray.
Isabel focuses her practice on issues relating to hedge funds, private equity funds and derivatives. She has experience structuring and advising a range of hedge funds and other private funds and their sponsors, and regularly assists funds and their sponsors with legal and risk management questions (including Advisers Act compliance issues) and with fund restructurings when necessary.
As part of the Supply Chain Compliance and Corporate Social Responsibility practice, Isabel advises investment advisers and institutional investors on ESG policies and procedures.
Isabel represents a number of large investors (both U.S. and non-U.S.) with respect to their private equity, commodity, infrastructure, real estate and hedge fund investments. She also advises clients in connection with co-investment, mezzanine, and secondary transactions.
Isabel Dische
Partner T F

28. About Michael Littenberg
Michael Littenberg is a partner at Ropes & Gray.
As part of his practice, for more than 25 years, Michael has been active in advising public and private companies and asset managers on ESG and corporate social responsibility matters, and he is widely viewed as the leading practitioner in this emerging area.
In the ESG and CSR space, Michael advises clients on, among other things:
Compliance with a wide range of enacted, pending and proposed regulatory requirements; “soft law” instruments; and industry and NGO codes of conduct, standards, frameworks and guidance
Due diligence
Risk and impact assessments
Structuring and implementation of tailored compliance policies, procedures, programs and codes of conduct 
Training
Benchmarking
Regulatory and voluntary disclosures and other communications
Stakeholder engagement
Grievance mechanisms 
Michael R. Littenberg
Partner T F 28

29. About Melissa Bender Melissa Bender is a counsel at Ropes & Gray.
Melissa advises hedge funds and other private funds (both domestic and offshore) on all aspects of their business with a focus on fund formation and regulatory compliance matters. Recent fund formations include innovative hybrid vehicles as well as more traditional hedge fund structures. Melissa’s experience also includes advising fund managers on and negotiating various contractual arrangements, such as side letters with investors, administrator and other service provider agreements and placement agent agreements.
She also has extensive experience representing U.S. and international institutional and other investors (including endowments, funds of funds, private foundations, sovereign wealth funds and family offices) in connection with all aspects of their investments in private funds.
Melissa previously worked in-house at a Fortune 500 company advising on securities compliance and corporate governance matters.
Melissa Bender
Counsel T F