Australia is going through an interesting change, led by AIST and APRA, with respect to how it approaches due diligence on managers, particularly hedge fund managers. There is a new “plain vanilla” manager-paid option now on the table. Not everyone is happy with this.
Following lots of consultations last year, AIST, with APRA’s vocal support, has introduced a kind-of ‘due diligence lite’ to the industry, whereby managers pay for the scrutiny applied to their back and middle offices by service providers acting on behalf of super funds. Traditionally, the super funds took on this responsibility themselves and paid for it themselves.
Because of the power of the AIST members, backed by APRA, managers are loath to complain publicly about the alternative due diligence regime. But everyone can see the inherent conflict in managers paying for this service. Who is the client, after all?
As reported in Investor Strategy News last year, the regime is a cost-saving enterprise which, by itself, should be a worthwhile exercise. The problem is: what is the real cost? What if the end client super fund relies on a due diligence ‘tick-the-box’ questionnaire which misses substantive problems at a potential fund manager provider’s business?
Big funds, for instance, which admittedly have the wherewithal to pay for proper due diligence, often employ private detectives to scrutinise boutique managers. To be blunt, a boutique manager who is having an extra-marital relationship, as an extreme example, is putting a whole lot more on the line than his or her marriage. Clients can also suffer the consequences.
So, into this new quagmire, Castle Hall, a global due diligence expert firm based in Canada, is about to release a new service which goes beyond traditional due diligence and applies an ESG focus.
Castle Hall, which has an Australian representative, Alex Wise, will shortly launch ‘ESGDiligence’ to support investors working to integrate ESG criteria into their governance, risk and compliance oversight over third-party asset managers.
The company says: “Investors, when allocating capital to third party managers, face three due diligence questions:
. “Is the investment manager conscious of ESG issues in their own business – particularly in areas such as gender diversity, workplace harassment policies, and environmental footprint.
. “Does the investment manager’s strategy take account of ESG criteria? and,
. “Do underlying assets – particularly portfolio companies – expose the investor to unexpected and unwanted ESG exposures?”
Greg Bright is publisher of Investor Strategy News (Australia)