• With more than 5,000 fund management strategies now assigned an ESG rating within Mercer’s Global Investment Manager DatabaseTM (GIMD), Mercer sees both innovation and opportunity for improvement
Only 9% of more than 5,000 investment strategies achieve the highest environmental, social and governance (ESG) ratings, according to an analysis performed by Mercer’s Investments business. Since 2008, Mercer has been assigning ESG ratings to investment strategies that span asset classes and geographic regions.
Using a four-point scale, Mercer considers strategies earning a 1 or 2 as “highly rated.” The ratings reflect the degree to which portfolio managers integrate the consideration of ESG factors and utilise shareholder stewardship practices within the investment process. Ratings are assigned by members of Mercer’s manager research boutiques as part of the core research process.
“We were not surprised to see a relatively low percentage of strategies achieve top ratings, as our approach involves setting a high bar. We aim to identify truly market-leading capabilities in integrating ESG factors and pursuing active ownership,” said Andrew Kirton, Mercer’s Global Chief Investment Officer. “There is still much work to be done by the investment community to fully integrate responsible investment practices. We would expect the number of highly rated strategies to increase over the next few years as more and more investment professionals come to recognise the sound investment and competitive reasons for active ownership.
“The way money is being managed is evolving – our role is to help clients achieve better investment outcomes, and we believe ESG analysis and active stewardship practices support this. In particular, active engagement with companies where performance is seen as wanting ought to have a complementing role in investment management, alongside the sale and purchase market disciplines.”
Of the 5,175 strategies assigned ESG ratings, 57% are in listed equities, 20% fixed income and the remaining 23% across real estate, private equity, hedge funds and others. Private equity has the highest proportion of highly rated ESG strategies, while hedge funds and fixed income had the fewest (see Figure 1). From a geographic perspective, Emerging Markets and Asia-Pacific have the highest proportion of top ratings, while Canada has the least (see Figure 2).
“The focus on ESG factors as a way of managing risk is still a relatively young concept” said Jane Ambachtsheer, Mercer’s Global Head of Responsible Investment. “Our ESG ratings methodology gives investors an additional lens through which to view portfolio managers, particularly how longer-term risks and opportunities align with their overall strategy and how ownership rights are utilised to see that strategy through.The separate ESG score allows clients to assess where their managers stand today, and provides a framework for thinking about where they would like see their managers get to in the future.”
As one might expect, 58% of the ESG1 rated strategies are “ESG” or “Sustainability” branded or thematic strategies, and 72% are managed by signatories to the United Nations Principles for Responsible Investment (PRI). Of the ESG2 rated strategies, a smaller percentage of strategies – 22% – are ESG or sustainability-branded. This means the other 78% are “mainstream” strategies which incorporate ESG into their analysis to make well-informed buy/sell decisions. PRI signatories manage 68% of the ESG2 rated strategies.
Strategies that achieve the highest ratings tend to share the following common features:
• A demonstration that ESG factors feature in investment teams’ decision making processes and corporate culture
• An effort made to build in some ESG factors into valuation metrics, using their own judgment about materiality and time frames
• A long-term investment horizon and low portfolio turnover
• Ownership policies and practices that include sufficient oversight, integration with investment decision-making and transparency
• For alternative assets, evidence of pursuing best practices in transparency and evaluation, monitoring and improvement of ESG performance as relevant for portfolio companies and sectors
• A demonstrated willingness to collaborate with other institutional investors to improve company, sector or market performance
• A commitment to ESG integration at the organisation-wide level
For more information about the ratings breakdown, please see Mercer’s ESG Ratings Update – 5,000 and Counting.
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