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Model Mandate Part 4: Alignment

Model Mandate Part 4: Alignment




ICGN Global Stewardship Principles (2020)


  • Investors should promote the long-term performance and sustainable success of companies and should integrate material environmental, social and governance factors in investment decision-making and stewardship activities (Principle 6)
  • Investors should develop and implement stewardship policies which outline the scope of their responsible investment practices (Principle 2)


Applying the asset owner’s investment policies

Asset owners should agree with their asset managers a commitment to long-term value creation and consideration of sustainability in the investment process that appropriately reflects the asset owner’s investment strategy and policies. Asset owners should expect managers will be able to explain how this has been reflected in their investment approach and decision making.

For most mandates the onus will be on the asset owner to ensure that their needs and expectations are clearly set out in the IMA. Sometimes this could be in the form of a statement of commitment from the asset manager to apply recognised standards written by third parties; this is the most likely approach if investing in pooled funds, for example. As well as standards with general application across investments, such as the Principles for Responsible Investment, there are standards that are specific to particular asset classes.

  • Appendix A provides examples of recognised standards.

However, in many cases, particularly in segregated mandates, asset owners may wish to ensure that their own investment strategy, targets, and policies will be applied when investment decisions are taken and will inform the way in which the asset manager oversees the investments.

Whichever is the case, the expected standards or principles are more likely to be carried into practice if they are either incorporated in or appended to the IMA or contained in a side letter agreed by the two parties. Depending on how they are written, this might be done by requiring adherence to the policies in some form or requiring the asset manager to take account of the policies in carrying forward their investments.

Where the asset owner has its own responsible investment policy or investment guidelines it is good practice for these to be appended to and referenced in the IMA. Some owners may also wish to set more specific investment and/or stewardship objectives for individual mandates; these should also be appended to the agreement.

There may be cases – for example, if asset owners are investing in funds dedicated to sustainable development or impact investment – where the fund prospectus and the asset manager’s standard terms are sufficient. Even then, the asset owner may wish to incorporate in or append to the contract specific themes or priorities – for example, which SDGs it wishes to promote.

  • Section 4.2 provides guidance on incorporating additional conditions in portfolio design.
  • Part 5 provides guidance on developing guidelines on how the asset owner wishes the asset manager to exercise its stewardship responsibilities.

Whatever set of policies or guidelines are agreed to be applied, the asset owner should expect the manager to be able to demonstrate that they are abiding by that agreement. This may be done primarily through written reports from the asset manager to the asset owner, the content and frequency of which should be agreed upon when the contract is negotiated.

In addition, asset owners may wish to ensure that the contract provides for regular face-to-face discussion at a suitably senior level. While the frequency of discussions will be a matter for agreement, good practice is that they take place at least once or twice a year.





Compliance: Ensuring that the asset manager undertakes to comply with the investment principles agreed with the client.



Clause 1: Commitment

Alternative 1 [where the manager will apply the client’s investment policies]:

The Manager shall perform its duties under this Agreement in accordance with the Client’s [Responsible Investment Policy – or other name used for the standard policy] [and/or separate written guidelines], which may be amended from time to time, the most recent version(s) of which [is/are] attached at Schedule A [and other Schedules if required].  


The Manager will manage the portfolio in accordance with the ICGN Global Stewardship Principles [and other relevant standards and industry best practice as specified in Schedule B]   


Alternative 2 [where the manager will apply its own policies]:

The Manager shall perform its duties under this Agreement in accordance with the Manager’s Responsible Investment Policy, attached as Schedule A. [The Manager shall not make amendments to its Responsible Investment Policy or the way it is executed without Client’s prior written approval]


The Manager will manage the portfolio in accordance with the ICGN Global Stewardship Principles [and other relevant standards and industry best practice as specified in Schedule B]


[Schedule A – the Client’s [or Manager’s] responsible investment policy or investment guidelines.]

[Schedule B – the standards agreed by the Client and Manager. This could be either the Manager’s standard list of commitments to standards and best practices or a bespoke list reflecting the Client’s policies, as appropriate]


Clause 2: Conflicts

Where the Manager believes that any policies or standards conflict with one another or with the Manager’s own fiduciary duties, whether generally or in specific circumstances, the Manager will consult in good faith with the Client as to which policies and standards shall and shall not be applied.



Consistency: Ensuring that the asset manager’s own assessment and decision-making processes are consistent with the agreed investment principles.



Clause 3: Standards

The Manager’s investment process and individual decisions shall reflect the policies and standards set out in Schedules A and B [and the ICGN Global Stewardship Principles], and the Manager will establish written guidelines to this end.


Clause 4: Care and diligence

The Manager shall ensure that its staff apply due care and diligence to comply with the requirements stated in Clause 3 above and shall report to the Client [insert agreed frequency] on how the process has been implemented.


Clause 5: Risk

The Manager understands that real or perceived non-compliance with the agreed policies and standards is a key risk for the Client and can, in severe cases, cause the Manager to default, leading to a possible reduction of assets under management or early termination of the agreement by the Client without any compensation being due to the Manager.



Due diligence: Permitting due diligence by the client into how the asset manager is meeting its commitments.



Clause 6: Dialogue

The Client and the Manager shall engage in a meaningful dialogue with respect to the implementation of the agreed policies and standards. This dialogue shall be regular, taking place at least [insert agreed frequency], and senior representatives of each party shall participate.


The Manager shall facilitate access by the Client to its staff such that the Client can gain assurance on an ongoing basis.




Example 1: Incorporating SDI and SDGs

In carrying out its duties under this Agreement, the Manager shall describe how SDIs and the SDGs inform its investment approach and policies. The statement should include reference to systemic material risks and recognise that materiality is dynamic and that sustainability topics can become financially material over time.


Example 2: Mapping SDGs

In carrying out its duties, the Manager shall undertake and disclose efforts to map the SDGs to the standards set out in Schedule A to identify gaps in current investment practices and evaluation methodology.

[Schedule A – the Client’s [or Manager’s] responsible investment policy or investment guidelines]



Asset allocation

Asset owners should consider the extent to which they wish to provide additional instructions or guidelines to the asset manager relating to investment decisions in addition to those set out in the responsible investment policy.

For example, some asset owners may have screening criteria or exclusion lists applying to all their mandates which are intended to exclude investment in certain industries, products, services, and/or named companies whose activities may raise other concerns. Some may have additional criteria in individual mandates, for example, relating to the markets or type of stocks in which the asset manager should invest or sustainability targets and benchmarks.

In many instances, such investment criteria will be incorporated in the responsible investment policy or investment guidelines, in which case the draft clauses in Section 4.1 may be sufficient. The wording of Clause 1 in Section 4.1 can also be adapted to cover any objectives or guidelines that are specific to the mandate, but the asset owner may wish to ensure that they are either incorporated in or appended to the IMA by other means.

Portfolio turnover

Turnover of holdings can be a significant indicator of whether an asset manager’s processes are fully aligned with the identified strategy and interests of clients. A turnover rate that is higher than expected can be an indicator of a lack of conviction to the strategy on the part of the asset manager or market-following behaviour, neither of which is likely to be in the asset owner’s best interests in the long term. Conversely, unexpectedly low turnover might signal inattention to risk management or a drift towards a more passive investment approach.

Asset owners will have different approaches to this issue – as will asset managers - but the proposed draft clauses suggest a model whereby the client agrees to an expected range of turnover with the asset manager, actual portfolio turnover is disclosed on a regular basis, and any turnover outside the expected range must be explained by the asset manager. The expected turnover range can be altered over time to reflect changes in the mutual expectations of asset owner and manager and varying market conditions.






Screening: Ensuring that screening criteria or exclusion lists are applied by the asset manager.



Clause 7: Exclusions

Alternative 1 [where the asset manager is instructed to exclude investments based on specified criteria]: The Manager shall not make investments on behalf of the Client which would contravene the Client’s responsible investment policy or would be in contravention of the restrictions on investments referred to in Schedule A [or Schedule C if the screening criteria do not form part of the Client’s responsible investment policy or investment guidelines].


These restrictions may be changed at the Client’s discretion, in which case the Manager shall be bound by such amendments [x] days following receipt of the amended List.


Alternative 2 [where the manager is instructed not to invest in named companies]: The Manager shall not make investments on behalf of the Client in certain companies or assets contained in a list to be sent by the client to the Manager from time to time.  As of the effective date, the companies and/or assets to be excluded from the portfolio are listed in Schedule A [or Schedule C if the exclusion list does not form part of the Client’s responsible investment policy or investment guidelines


This list may be changed at the Client’s discretion, in which case the Manager shall be bound by such amendments [x] days following receipt of the amended List.


In the event of the Exclusion List supplied by the Client conflicting with exclusions suggested by the Manager or a data provider engaged by the Manager, the exclusions specified by the Client shall prevail.


[Schedule C – the Client’s screening criteria or exclusion lists if maintained separately from the responsible investment policy or investment guidelines]



Turnover: Including an appropriate expected turnover range and requiring disclosure and discussion when this is breached.



Clause 8: Expectations

The expected annual turnover for this investment strategy is expected to [range between XX% and YY% or be below YY%], though the Client acknowledges that certain objective market circumstances and necessary investment decisions may lead it to accept a level exceeding this.


The Manager shall report Portfolio turnover on a [insert agreed frequency] basis and will provide an explanation if turnover [falls outside the agreed range or exceeds YY%] on an annualised basis [over the agreed period].


The Manager may ask for a review of the expected turnover level on an [insert agreed frequency] basis.





These examples are drafted as clauses to be included in the contract but might also be incorporated into the asset owners’ responsible investment policy, investment guidelines or a separate statement of objectives specific to a particular mandate.


 General instruction

Example 1: Sector specific weighting

In carrying out its duties, the Manager shall identify relevant general and sector-specific material SDG-related key performance indicators and outcomes [including those endorsed by the GISD Alliance]. Such indicators and outcomes shall inform the overall assessment of investment prospects and be given significant weight for determining allocations. The Manager shall describe how such factors have impacted the composition and risk-return performance of the portfolio.


Example 2: Social capital

The Manager shall incorporate consideration of the following factors into investment analysis, asset allocation [and portfolio company engagement]:

  1. Diversity, equity, and inclusion – Consideration of diversity, equity, and inclusion as part of human capital management including, but not limited to company policies and procedures and board and senior leadership diversity.
  2. Indigenous Rights – Consideration of Indigenous rights and reconciliation in a manner with the provisions of the  United Nations Declaration on the Rights of Indigenous Peoples
  3. Human Rights – Consideration of human rights in accordance with the UN Guiding Principles on Business and Human Rights
  4. [Other factors as identified by the Client from time to time/ as specified in Schedule A]


 Targets and benchmarks

Example 1: SDI Mandates

In carrying out its duties under this Agreement, the Manager shall ensure that at least [50%] of the value of the assets under management is invested in investments that are Sustainable Development Investments (SDIs) [or investments that contribute to [one or more specified SDGs].

Example 2: Carbon reduction

The Manager shall adjust the portfolio to reduce the absolute carbon footprint across Scope 1, 2 and 3 emissions by [50%] by [2030] while working to achieve a net-zero carbon footprint by [2050].



Example 1: SDG positive contribution

In carrying out its duties under this Agreement, the Manager shall invest [only] in companies that generate more than [50%] of their revenue from products and services that contribute to [the SDGs/ specified SDGs].

Example 2: Nature exploitation

In carrying out its duties under this Agreement, the Manager shall exclude from the portfolio companies associated with exploiting resources [within International Union for the Conservation of Nature (IUCN) protected areas I-IV.]

Example 3: Gender imbalance exclusion

The Manager shall exclude from the portfolio companies that have no women on the board of directors and shall strive to achieve a portfolio with only issuers that have 30% women on the board by [2030]. 

Example 4: UN Global Compact violations

The Manager shall exclude from the portfolio companies that are found to have violated the principles of the UN Global Compact as identified by [name of data provider].


 Assessment and review

The Manager shall [insert agreed frequency] review all investments to determine their ongoing suitability to qualify as SDIs.


Systemic risks

As well as the specific risks affecting their individual investments, asset owners should be aware of risks which can affect the investment value of their overall portfolio. This includes not only risks which affect the immediate volatility of their portfolio, but also those systemic risks which can affect value over a longer period or a broader spread of investments, markets, and economies.

Systemic risks are those that place the financial system or a major part of it – either in an individual country, a region, or globally – in real and immediate danger of collapse or serious damage with the likelihood of material damage to the economy.

They include some of the environmental and social risks to long-term sustainability that the SDGs aim to address. Long-term investors in general are highly exposed to systemic sustainability issues and may have limited ability to diversify away from them, but they can influence them through their stewardship activities.







Systemic risks: Aligning the asset manager and client’s understanding of what the key risks are to achieving the client’s portfolio goals.



Clause 9: Identifying and monitoring

The Manager acknowledges the need to consider long-term and systemic risk factors and market failures to manage risks which are relevant on the Client’s long-term investment horizon and to the Client’s fiduciary responsibilities.


The Manager shall have a process for monitoring current or potential investments in relation to relevant long-term and systemic risks and market failures. The Manager shall ensure that its staff exercise due care and diligence when complying with this monitoring process, including considering the extent to which such long-term factors generate investment risks or opportunities.


Clause 10: Advocacy

The Manager shall play a positive role in advocating for appropriate and fit-for-purpose market regulation and infrastructure needed to manage and mitigate systemic risks and correct market failures that have the potential to threaten the stability of the financial system and the long term returns of the Client and shall report to the Client at least [insert agreed frequency] on its activities in this regard.




Systemic Risks

Example 1: Climate related disclosure

The Manager shall commit to the [Final Recommendations of the Task Force for Climate-related Financial Disclosures (TCFD)– [or other standard or best practice] and shall provide the Client [insert agreed frequency] with a clear and comparable overview of how the investment process incorporates climate-related risks.

The Manager shall report to the Client, at least [insert agreed frequency], on fossil fuel and carbon-intensive transition risk in the portfolio, and when appropriate, advise the Client about ongoing or possible risk mitigation strategies.


Example 2: Biodiversity loss

The Manager acknowledges the importance of biodiversity and nature health in safeguarding environmental sustainability. In doing so the Manager shall commit to the [The Task Force for Nature-related Financial Disclosures (TNFD) – or other standard or best practice] and shall provide the Client [insert agreed frequency] with a clear and comparable overview of how the investment process incorporates biodiversity loss-related risks.


 Public Policy

Example 1: Advocacy

The Manager shall identify and exploit opportunities to engage regulatory bodies and standard-setters to improve the development and application of standards regarding the SDGs [for example, disclosures on TCFD or TNFD]. 

Example 2: Collective engagement

The Manager shall participate in appropriate collective and collaborative efforts to advance the SDGs and enhance influence with government authorities and standards-setting bodies with the intention of producing impacts which are aligned with the SDGs [or specific SDGs].


Fee Structures and Remuneration

Asset owners may wish to ensure to the extent possible that the fees to be paid to the asset manager and the manager’s own remuneration structures and culture are appropriately aligned with the owner’s investment objectives.

Fee structure

Asset owners should have a clear understanding of the proposed fee structure before entering into an IMA. Decisions on the appropriate fee structure are a matter for negotiation between the asset owner and manager and should be set out in detail in the contract. The contract should cover:

  • The management fee – this is normally set either as a fixed amount; as a proportion of the client’s assets (the ‘ad valorem’ approach); or calculated as a proportion of fund returns on a relative or absolute basis – or a combination of these approaches.  

Asset owners should establish what services will be covered by the management fee. Practice varies among asset managers and individual investment products. For example, some managers will include the cost of their stewardship activities on behalf of the client in the standard management fee, but in other cases these may be subject to additional fees or charges.

  • Performance fees (if any) – for example, based on the return to the client or on the achievement of any targets or benchmarks specified in the agreement (including those relating to sustainability and stewardship).


Asset owners should also seek reassurance that the asset manager’s remuneration structure is aligned with their interests and those of their beneficiaries, and that it does not incentivise the manager’s staff who are responsible for taking investment decisions to take on excessive levels of risk or be overly focused on short-term returns.

Asset owners should request information from asset managers about their remuneration policy and structure and other incentives available to individual fund managers as part of the due diligence process, to assess whether they are compatible with the owner’s investment objectives.

  • Appendix A contains guidance on seeking information about the asset manager’s approach to remuneration.






Fee transparency: Ensuring that the fee structure for the services provided by the asset manager is transparent.



Clause 11: Disclosure

The Manager shall disclose to the Client information on the fee structure, including details of the specific services that the Manager will provide for these fees, any services or circumstances which would incur additional fees, any costs and expenses for which the Client may be liable, and the criteria to be met by the Manager in order for any performance fees to be paid.


[Note: this is a general ‘catch all’ clause and is not a substitute for the more detailed fee schedule which should be included in or appended to the investment management agreement]    



Aligning interests: Requiring that remuneration structures appropriately align the interests of the asset management firm and individual fund managers with those of the client.



Clause 12: Alignment

The Manager shall ensure that the pay and incentive policies and structures for its staff align their interests appropriately with those of the Client and the investment time horizon of the portfolio. The Manager shall disclose how this is done and any other actions taken to ensure that its incentive structure is appropriate for generating balanced long-term risk-adjusted investment returns.


Disclaimers               Acknowledgements