This due diligence questionnaire (DDQ) has been developed to help investors understand and evaluate hedge fund managers’ approaches to responsible investment.
The questions it contains can be used as part of an RFP process, during manager reviews or monitoring, in client meetings, or incorporated into an ongoing dialogue. The PRI encourages investors to tailor the questions to suit their broader objectives.
The DDQ should not be considered in isolation, but rather used to support a wider information-gathering process. Investors are encouraged to:
This is an update of the PRI’s previous hedge fund DDQ, published in 2017. To promote consistency, it is designed to complement information gathered through the PRI’s Reporting Framework – particularly the hedge fund module – as well as responsible investment disclosure standards and frameworks developed by external organisations. The DDQ will be updated periodically to align with future changes to the Reporting Framework.
Notes on using this DDQ
Appendix 1 indicates whether DDQ questions map to an indicator in the Reporting Framework, the requirements contained in the CFA Global ESG Disclosure Standards for Investment Products or the Sustainable Finance Disclosure Regulation (SFDR).
Some questions in the DDQ focus on an investment manager’s overarching approach to responsible investment, while others are specific to a particular investment strategy.
The DDQ provides guidance on the type of information each question is aiming to elicit. Investment managers are encouraged to provide information that goes beyond these points when responding to questions.
Where relevant, we refer to the Reporting Framework glossary of key terms.
Please contact [email protected] if you have questions or feedback regarding this DDQ.
1.1 What is your organisation’s overall approach to responsible investment?
Your overview (no longer than 400 words) should address the following questions: i) Why does your organisation engage in responsible investment? ii) Does your organisation apply responsible investment principles across all asset classes and strategies, or across a selection? iii) Has your organisation’s approach to responsible investment changed significantly in the past 12 months?
1.2 Does your organisation have a responsible investment policy?
If it does, provide a copy. State whether the policy is publicly available, specify the proportion of hedge fund assets it applies to and describe the process for reviewing and updating it. If your organisation does not have a policy, explain why not.
1.3 What international standards, industry (association) guidelines, reporting frameworks, or initiatives that promote responsible investment practices has your organisation committed to?
Examples include publicly supporting the Paris Agreement, being a PRI signatory, endorsing the TCFD recommendations and participating in the United Nations Global Compact.
1.4 How is responsible investment overseen and implemented within your organisation?
List the roles and/or committees involved in responsible investment activities, including stewardship. Describe how these roles and/or committees are positioned and describe any external resources used to support these activities.
1.5 How are responsible investment objectives incorporated into individual or team performance reviews and compensation mechanisms?
Describe how responsible investment objectives are defined and measured and to which positions they apply (e.g. investment professionals, executive management).
1.6 What responsible investment training does your organisation provide to staff?
Describe what the training covers, which staff receive it, and how frequently it takes place.
2.1 How is ESG materiality analysed for this strategy?
Mention the ESG factors that are analysed (e.g. climate change, human rights) and how their financial materiality is determined, including any tools, standards or data that are used.
2.2 How are financially material ESG factors incorporated into this strategy?
Mention how material ESG factors influence portfolio construction and security selection. For quantitative strategies, mention the use of any back-testing or simulations that are applied to the strategy, and how ESG factors are positioned alongside traditional factors or incorporated into them. Disclose the roles/committees that are responsible for incorporating ESG factors in this strategy. Provide two examples from the past 12 months of how ESG factors have influenced security selection and/or portfolio construction for this strategy.
2.3 How are ESG screens applied to this strategy (if applicable)?
Mention any positive, norms-based or exclusionary screens that are applied, including why and how they are used in combination with other responsible investment activities (such as stewardship). Specify whether your organisation can apply client-directed screens to this strategy.
2.4 Does this strategy seek to shape sustainability outcomes? [1]
If so, mention i) the frameworks/tools used to identify the intended or unintended sustainability outcomes (e.g. the Sustainable Development Goals, the Paris Agreement), ii) how sustainability outcome objectives are selected iii) steps being taken to intentionally increase positive and/or decrease negative sustainability outcomes (e.g. those that might adversely impact the SDGs).
2.5 How do responsible investment considerations influence the use of derivatives within this strategy (if applicable)?
Mention whether responsible investment considerations influence i) why and how derivatives are used (e.g., to hedge climate-related risks) ii) the selection of derivatives (e.g. selecting derivatives with sustainability mechanisms/elements embedded).
2.6 How are ESG incidents involving investee entities managed (if applicable)?
Mention how ESG incidents/controversies are monitored for investee involvement, any actions taken in response to their involvement (e.g. reducing exposure to the entity) and how their involvement is communicated to clients.
2.7 Does your organisation measure whether its responsible investment approach affects the financial performance of this strategy?
If so, mention how responsible investment factors are considered as part of performance attribution analysis.
3.1 Does your organisation have a stewardship policy?
If so, provide a copy. State whether the policy is publicly available and specify the proportion of hedge fund assets it applies to. If applicable, specify whether your organisation is willing to vote in line with a client’s voting policy, as opposed to its own, upon request.
3.2 How does your organisation determine its stewardship priorities?
Mention how your organisation approaches selecting ESG issues and entities to engage with.
3.3 What stewardship methods does your organisation use?
Mention if/how your organisation escalates stewardship activities when initial efforts are deemed unsuccessful (e.g. publicly engaging with the entity via open letters), the approach taken to collaborative stewardship initiatives (such as collaborative engagements) and how often/to what extent specific escalation methods have been used over the past twelve months.
3.4 How are stewardship activities integrated into the investment process (if applicable)?
Mention how stewardship is incorporated into security selection and/or portfolio construction.
3.5 How does your organisation assess the effectiveness of its stewardship activities?
Mention any key performance indicators used to measure the effectiveness of engagement efforts and whether any of these relate to real-world outcomes (such as the SDGs). Provide two examples of engagements your organisation has conducted in the past 12 months and provide an assessment of the effectiveness of these engagements to date.
4.1 What information is disclosed in regular client reporting on the responsible investment activities and performance of this strategy?
Mention the types of information disclosed (e.g., stewardship activity, ESG ratings, weighted average carbon intensity or other metrics) and the frequency of the disclosures.
4.2 Which disclosure initiatives, and/or regulatory regimes, influence client reporting for this strategy, if any?
Mention whether the responsible investment reporting is aligned with any jurisdiction-specific regulation (e.g., SFDR or the EU Taxonomy Regulation in the European Union), the TCFD recommendations or any other voluntary disclosure initiatives (e.g., stewardship codes). State whether your organisation would consider expanding its reporting scope in response to client requests.
4.3 Is ESG information associated with the strategy’s short positions disclosed in regular client reporting (if applicable)?
If it is, mention i) whether the greenhouse gas emissions associated with the short positions taken by the portfolio are disclosed ii) whether any responsible investment considerations that contributed to the shorting rationale are disclosed. If short positions are not disclosed, explain why.
4.4 How does your organisation audit the quality of its responsible investment processes and/or data?
Mention any internal quality audits conducted or any third-party independent assurance of responsible investment processes and/or data received.
5.1 How does your organisation manage its internal ESG risks, opportunities and impacts?
Mention the main steps your organisation is taking to improve its ESG performance. Examples might include initiatives to reduce its carbon footprint and to enhance the diversity of its investment team.
5.2 Is there any information on your organisation’s responsible investment approach, not otherwise covered in the DDQ, that you would like to share?
You could, for example, choose to expand upon your organisation’s approach to specific ESG issues, such as human rights or climate change, highlight any responsible investment challenges your organisation faces, or provide an overview of your organisation’s policy engagement activities.
Document checklist
A suggested checklist of documents that investors can request from investment managers during the due diligence process.
☐ Responsible investment policy
☐ Exclusion policy & exclusion list
☐ PRI transparency report
☐ (Proxy) voting policy (if applicable)
☐ (Proxy) voting records (if applicable)
☐ Code of conduct
Appendix 1: Indicator mapping
Below we outline how the questions in this DDQ map, either fully or partially, to the following indicators within the PRI 2021 pilot Reporting & Assessment Framework and the CFA Global ESG Disclosure Standards for Investment Products . The mapping also indicates whether the DDQ questions correspond with the European Union’s SFDR .
Policy and governance
1.1 What is your organisation’s overall approach to responsible investment?
1.2 Does your organisation have a responsible investment policy?
1.3 What international standards, industry (association) guidelines, reporting frameworks, or initiatives that promote responsible investment practices has your organisation committed to?
1.4 How is responsible investment overseen and implemented within your organisation?
1.5 How are responsible investment objectives incorporated into individual or team performance reviews and compensation mechanisms?
1.6 What responsible investment training does your organisation provide to staff?
Investment process
2.1 How is ESG materiality analysed for this strategy?
2.2 How are financially material ESG factors incorporated into this strategy?
HF 4, HF 4.1, HF 5, HF 6, HF 6.1, HF 8
2.3 How are ESG screens applied to this strategy (if applicable)?
2.A.9.a, 2.A.9.b, 2.A.9.c, 2.A.9.d, 2.A.10.a, 2.A.10.b
2.4 Does this strategy seek to shape sustainability outcomes?
SO 1, SO 1.1, SO 2, SO 5
2.A.19.a, 2.A.19.b, 2.A.19.c, 2.A.19.d, 2.A.19.e, 2.A.19.f, 2.A.19.g, 2.A.19.h, 2.A.19.i, 2.A.19.j, 2.A.19.k
2.5 How do responsible investment considerations influence the use of derivatives within this strategy (if applicable)?
2.6 How are ESG incidents involving investee entities managed (if applicable)?
2.7 Does your organisation measure whether its responsible investment approach affects the financial performance of this strategy?
Stewardship
3.1 Does your organisation have a stewardship policy?
ISP 11, ISP 12, ISP 12.1
3.2 How does your organisation determine its stewardship priorities?
3.3 What stewardship methods does your organisation use?
3.4 How are stewardship activities integrated into the investment process (if applicable)?
3.5 How does your organisation assess the effectiveness of its stewardship activities?
Reporting and verification
4.1 What information is disclosed in regular client reporting on the responsible investment activities and performance of this strategy?
4.2 Which disclosure initiatives, and/or regulatory regimes, influence client reporting for this strategy, if any?
4.3 Is ESG information associated with the strategy’s short positions disclosed in regular client reporting (if applicable)?
4.4 How does your organisation audit the quality of its responsible investment processes and/or data?
Additional information
5.1 How does your organisation manage its internal ESG risks, opportunities and impacts?
5.2 Is there any information on your organisation’s responsible investment approach, not otherwise covered in the DDQ, that you would like to share?
[1] For further reference see Parts 1, 3, and 3 of the five-part SDG framework presented in PRI (2020) Investing with SDG outcomes.
Content authored by PRI Association
For content authored by PRI Association, except where expressly stated otherwise, the opinions, recommendations, findings, interpretations and conclusions expressed are those of PRI Association alone, and do not necessarily represent the views of any contributors or any signatories to the Principles for Responsible Investment (individually or as a whole). It should not be inferred that any other organisation referenced endorses or agrees with any conclusions set out. The inclusion of company examples does not in any way constitute an endorsement of these organisations by PRI Association or the signatories to the Principles for Responsible Investment. While we have endeavoured to ensure that information has been obtained from reliable and up-to-date sources, the changing nature of statistics, laws, rules and regulations may result in delays, omissions or inaccuracies in information.