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More than a quarter of assets under management worldwide are invested in sustainable strategies, and investors are increasingly interested in integrating these strategies into their financial plans and investment portfolios. This is prompting asset managers to expand their sustainability-related services. But though it’s encouraging, the rapid pace at which the sustainable investment market is growing has not allowed much time for investment professionals – namely, due diligence officers – to develop systematic frameworks for answering some basic questions, like: Which asset managers are doing the best job providing sustainable investment services? And whose approach is the most effective?

The Investment Integration Project (TIIP) recently partnered with the Money Management Institute (MMI) to convene industry experts and investment gatekeepers to discuss how best to support due diligence officers, financial consultants and investors in navigating this emerging focus on sustainability. Our objective was to help them distinguish between the increasing number of sustainability-focused asset managers and products available, and to identify those that align with their interests and goals.

We’ve compiled a new report based on these conversations: “Sustainable Investment Products and Due Diligence” shares insights and reflections on the nature and types of sustainability products on the market, as catalogued by TIIP and MMI, and offers preliminary guidance on assessing their quality and efficacy. It does not provide all the answers, to be sure, but it does provide a useful stepping stone along the pathway to the development of needed due diligence procedures for this growing investment discipline.

The report notes that there are various ways that investors and their due diligence officers can select the sustainability-focused asset managers and products that best align with their investing practices. First, a due diligence officer should identify the type of sustainable investment manager they are evaluating. Each type of manager aligns with a different investor motivation for pursuing the practice, and each requires a different due diligence approach. These types include:

• Financially-driven managers that incorporate sustainability factors into security valuation and portfolio construction, to mitigate related risks, pursue related rewards and enhance value;
• Client-driven managers that respond to client requests to create separate accounts that incorporate specific sustainability considerations;
• Manager-driven managers that incorporate sustainability considerations into their products or services to attract clients with social and environmental interests; and
• Impact- or system change-driven managers that pursue sustainability impact or system-change goals along with financial targets.

Second, there are a series of conventional manager due diligence considerations that can be usefully applied to assess managers in the context of sustainable investment. These include:

• Intentionality: the extent to which an asset manager deliberately produces intended outcomes or does so accidentally (the former being replicable and acceptable, and the latter being haphazard and undesirable);
• Philosophy: the extent to which the manager explicitly and rigorously incorporates sustainable investment considerations into its philosophy (beliefs, policies) and indicates whether it applies these considerations to manage risk, engage with holdings and/or avoid certain issues;
• Process: how clearly and purposefully the asset manager applies its philosophy in the capital markets, to create an integrated and effective investment approach; and
• People: the extent to which sustainable investment staff are integrated into other business units in their broader investment firm (vs. operating in a silo), and their skills, proven competencies, background and commitment.

Finally, due diligence officers can use different benchmarks to compare the performance of sustainable investment strategies. Notably, conventional indices enable investors to examine an asset manager’s financial performance vis-à-vis widely accepted financial yardsticks, while sustainability indexes enable them to compare managers to a sustainability-focused benchmark. Analyses using both types of benchmarks can provide insight into how much of any performance difference between an asset manager’s particular strategy and the industry benchmark is attributable to the manager’s sustainability policies.

These three ways of identifying and comparing sustainable investment asset managers provide an important starting point for investors and their due diligence officers to begin to answer the question: Who is doing a good job with their sustainable investments, and who is not? This question can prompt some much-needed conversations about sustainable investment and due diligence moving forward.

Steve Lydenberg is the founder and CEO of The Investment Integration Project (TIIP), and a partner at Domini Impact Investments.

William Burckart is the president and COO of TIIP, and a fellow of High Meadows Institute.

Jessica Ziegler is the director of research for TIIP. 

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