Model Mandate Part 1: Introduction
1.1
Context
The Model Mandate guidance was originally published in 2012 by International Corporate Governance Network (ICGN). Led by investors responsible for assets under management of around USD $70 trillion, ICGN advances the highest standards of corporate governance and investor stewardship worldwide in pursuit of long-term value creation, contributing to healthy and sustainable economies, society, and environment.
The Model mandate was introduced to help asset owners express what they expected of the asset managers that they engaged, and to reflect those expectations in contracts and mandates. Its particular focus was on the parts of mandates and investment management agreements relating to the investment approach, stewardship, ESG and the manager’s accountability to their clients rather than on other issues covered by mandates such as financial performance.
The environment in which asset owners and managers operate, and the expectations and obligations placed on them, has changed considerably since then. There have been significant changes in capital allocation both between and within asset classes and exponential growth in the value of assets allocated to sustainable and responsible investing.
In parallel, there has been an increased emphasis on investors’ responsibilities as stewards, not just of the interests of their own clients and beneficiaries but of the future of society and the planet itself. In addition to guidance such as the Principles for Responsible Investment (PRI) and ICGN’s own Global Stewardship Principles, national Stewardship Codes and mandatory public reporting requirements for investors are increasingly common. Greater focus is now placed on the need for investors to explain how they assess social, environmental and other non-financial factors and how they monitor their investments.
There is also an increased public and political expectation that investors should contribute to long-term sustainable value creation, including through addressing the UN Sustainable Development Goals (SDGs). In recognition of this, the Global Investors for Sustainable Development (GISD) Alliance was established in 2019. The GISD Alliance’s members consist of 30 leaders of major financial institutions and corporations spanning all the regions of the world, and it’s mission is to encourage Sustainable Development Investing (SDI) – investment that is explicitly intended to make a positive contribution to one or more of the SDGs.
For this to happen, there should be an alignment of incentives between asset owners and their managers and a shared understanding of the outcomes being sought. The terms of the mandate agreed between them are crucial to achieving both objectives. This is reflected in this updated edition of the Model Mandate, developed in partnership by ICGN and GISD Alliance.
Whatever the nature of the mandate, asset owners should ensure that their expectations in relation to sustainability and stewardship are reflected in investment management agreements, side letters and other legal contracts with asset managers. Even when investing in a sustainable or responsible investment fund it cannot be taken for granted that this will be the case, as asset managers can take very different approaches to addressing sustainability factors or undertaking stewardship.
1.2
Purpose of the Model Mandate
The revised Model Mandate guidance is addressed to all asset owners and managers, as well as to those who advise them and who set the regulatory and reporting frameworks in which they operate. While intended to be relevant to all mandates irrespective of the owner’s investment strategy, it contains specific advice on how to reflect SDI objectives in mandates and contracts alongside the more generally applicable guidance.
The primary purpose of the guidance is to help asset owners ensure that their investment strategy and their own fiduciary obligations to clients and beneficiaries are properly reflected in the terms agreed with asset managers, and that they have the ability to monitor whether their objectives and interests are being met.
The Model Mandate does so by working systematically through the different issues related to stewardship and sustainability that mandates should address, and by providing draft contract clauses including specific references to SDI. It identifies information that asset owners should seek to obtain through the tendering and due diligence process that could help them identify the asset manager whose investment approach best meets their own expectations and those of their beneficiaries.
The Model Mandate also identifies information that asset owners should aim to obtain throughout the lifetime of the mandate. It is important that asset owners conduct ongoing monitoring, as they retain fiduciary responsibility for the way in which their investments are managed even though some stewardship
functions have been delegated to an asset manager.
The Model Mandate may also be valuable to guide asset managers, as it potentially provides a common framework for discussing with existing and potential clients how issues relating to sustainability and stewardship can be incorporated into their mandates. Asset managers are encouraged to incorporate draft
clauses in their own standard contract terms or offer them as
options for those clients that request them.
The benefits of such a common framework increase considerably the more widely it is adopted. For that reason, the guidance has been designed to be used across different asset classes and markets. By addressing the range of stewardship and sustainability issues that should be covered in contracts at a
relatively high level, this framework can be adapted or built on to
work alongside local requirements.
The Model Mandate may therefore also be of interest to advisors to asset owners and managers such as investment consultants, and to organisations that aim to promote long-term sustainable value creation through the investment chain such as standard setters, regulators, and industry associations. By endorsing and encouraging the use of the Model Mandate they can contribute to providing that common framework.
1.3
Structure of the Model Mandate
One of the main changes between this edition of the Model Mandate and the previous version is the greater emphasis that it places on the importance of sustainability as an investment consideration, and encouragement to commit to SDI.
Part 2 provides a brief overview of what SDI means and how it can be undertaken by investors.
This is followed by Part 3 which identifies the issues that asset owners should consider before negotiating a contract with an asset manager, such as clarity about their own fiduciary duties, the investment outcomes they are seeking and the strategy and detailed policies through which they are to be achieved.
This is followed by Part 3 which identifies the issues that asset owners should consider before negotiating IMAs with asset managers, such as clarity about their own fiduciary duties, the investment outcomes they are seeking and the strategy and detailed policies through which they are to be achieved. These considerations are important when selecting a manager to ensure that they have the policies and capabilities required to meet the owner’s needs. Part 3 is supplemented by Appendix A which identifies topics that asset owners might wish to include in their Requests for Proposals (RFPs) and due diligence questionnaires.
Parts 4-6 cover the specific issues relevant to sustainability and stewardship that should be addressed in mandates and IMAs. They explain the different considerations that are relevant to each issue and provide general draft contract clauses that asset owners and managers may wish to use as the basis for the wording in relevant parts of the IMA.
Throughout Parts 4-6 there are examples of SDI related wording which asset owners could consider using either directly in mandates and IMAs or in policies that can be appended to the IMA. As an asset owner’s objectives and priorities can be subject to change, many prefer the latter option. The draft clauses provided are not a definitive or comprehensive list. The aim is to help asset owners think about which approach might be most suitable for their investment approach and SDI objectives.
These sections are divided into three broad themes, building on the ICGN Global Stewardship Principles:
- Part 4: Alignment – which includes, for example, incorporating the asset owner’s investment principles and priorities into the mandate, and integration of sustainability and other long-term factors;
- Part 5: Stewardship – which includes, for example, the monitoring and engagement to be undertaken by the asset manager and the exercise of voting rights; and
- Part 6: Accountability – which includes, for example, the asset manager’s own governance arrangements, how conflicts of interest are managed, and the information to be provided by the manager to the client for monitoring purposes. This last issue is particularly important, and further information is therefore provided in Appendix B.
The Model Mandate is broadly applicable and therefore does not provide definitive guidance on any of the individual issues that it covers. Relevant papers and initiatives are hyperlinked throughout this document for further reading. Links to more detailed information and guidance about these issues can be found on the ICGN website.
1.4
How to use the Model Mandate
The Model Mandate is intended to be applicable to a wide range of investment approaches and asset classes, and capable of being adopted by asset owners and managers who may have differing fiduciary duties and legal obligations.
Not all of the contents of the guidance will be relevant to all mandates. This is particularly true of the draft contract clauses and the information identified in the appendices. Asset owners and managers using the Model Mandate will therefore need to think about how to apply the guidance to their own circumstances.
Depending on the market or markets in which the asset owners and their managers operate there may be local regulations or other requirements, for example in relation to the asset owners’ fiduciary duties, that also need to be taken account when assessing how to apply the Model Mandate. Different categories of asset owners may have differing fiduciary duties, and the duties and legal obligations of their asset managers may also vary.
Another consideration for asset owners is whether they have the ability to negotiate the exact terms to be included in the investment management terms. This is more likely to be the case for segregated mandates for which they are the sole owner than for jointly owned pooled funds.
Asset managers will typically have standard terms for their investment products, and while many are willing to vary these terms to a degree or agree to additional terms in an appendix or side letter this will not always be the case, particularly if they are investing in a pooled fund.
In these circumstances asset owners may wish to use the guidance to assess whether the terms offered by the asset manager are compatible with those in the Model Mandate before making an appointment. They may also wish to make the same assessment when considering whether to renew or extend existing mandates.