2020 will be remembered for the (ongoing) tumult of Covid-19. This year of challenge brought a new level of focus on ESG: Covid was just one catalyst for unprecedented attention from global investors across the broad landscape of the environment, social issues, and governance. At the same time, the challenges of greenwashing, entrenched behaviours within asset managers - and the lack of agreed definitions around what ESG investing actually “is” - all drive the need for effective ESG due diligence. Against this background, Castle Hall has identified 5 topics we have seen when conducting ESG due diligence on behalf of our clients over the past year.
The implosion of Wirecard is one of the most stunning corporate failures in recent years. The high flying company was the prestigious symbol of corporate Germany’s pivot to fintech and a darling of the EU technology industry. In 2018 the firm joined the 30 companies in Germany’s DAX stock index with a capitalization of €25bn, with the fintech payments processing company symbolically replacing “old economy” Commerzbank. Now Wirecard has the reputation of being the only member of the DAX ever to go into liquidation.
Castle Hall has identified four themes from the Wirecard debacle which are relevant to the asset management industry. As investors conduct due diligence, be it on hedge funds, private equity, real estate, infrastructure or long only funds, Wirecard provides valuable insights which can be applied to our own industry.
To state the obvious, the Covid-19 novel coronavirus has rapidly become the most serious global public health crisis since the Spanish Flu epidemic of 1918, more than a century ago.
What should investors and asset managers do in such a rapidly changing crisis situation? Clearly, due diligence as usual is not on the agenda. Equally, investors are typically fiduciaries and are often regulated. Putting all diligence on hold is, therefore, not an option – clients, plan members and beneficiaries expect investing entities to manage risks and protect their interests, especially at a time of crisis.
The financial services and asset management industries are also impacted by this fundamentally different business environment. Asset Managers have been implementing policies and procedures to address ESG issues impacting their own operations such as Diversity & Inclusion, their Environmental Footprint, and Business Ethics among others.
Global issues such as climate change, resource scarcity, income inequality, diversity and corruption have led many businesses to fundamentally change their corporate strategy.
The financial services and asset management industries are also impacted by this fundamentally different business environment. On the buy side, leading investors now consider Environmental, Social and Governance (“ESG”) factors on many levels. Investors may measure and set specific targets to reduce the carbon footprint of their overall portfolios, or may engage with portfolio companies to improve their behavior and disclosure of ESG data.
Castle Hall was delighted to contribute to AIMA Australia’s Investor Advisory Group’s “Trust but Verify” operational due diligence roundtable. The roundtable covers many aspects that are consistent to asset owners globally, with views from leading Australian Super Funds as well as the Consultant’s perspective from Castle Hall and Willis Towers Watson.
ODD, often an optional luxury before 2008, has become a mandatory component of alternative asset investing and is the tool deployed by investors to ensure that alternative investment managers meet ever evolving and more demanding requirements.
Download the Due Diligence 3.0 white paper and discover how investors can enhance their ODD programs.
For professional investors, Operational Due Diligence (“ODD”) has become an increasingly important element of their process to allocate capital to third party asset managers.
Internal and external stakeholders now see a DD Policy as best practice to establish a consistent, evidenced and auditable diligence process across all external manager relationships. When drafted effectively, a policy document guides daily activities, and equally provides a longer-term, strategic framework to oversee the inherent risks of a third-party manager program. Indeed, some global regulators have begun to identify ODD policies as a regulatory issue for prudentially regulated entities.
Cybersecurity has become a top operational due diligence priority. This white paper, supported by a webinar, provides practical guidance to help investors evaluate an investment manager’s cybersecurity environment. What are the questions to ask, and how should an investor rate a manager’s responses?
This paper seeks to bridge the gap between what can quickly become extremely technical subject matter, and more practical guidance as to how to approach cybersecurity during a real world operational diligence review.
Castle Hall Diligence is pleased to present a revised and updated second edition of Redefining Corporate Governance. In the context of a more sophisticated, institutional ODD agenda, investors continue to seek guidance as to implementation of a best practice operational due diligence program. This white paper sets out six criteria – “The 6 C’s of Governance” – which provide a framework for governance best practices.