Mercer is currently the only investment consultancy assigning explicit Environmental, Social & Governance (ESG) ratings across all asset class strategies as part of its manager research process.
Mercer’s manager research team now evaluates more than 6,000 investment manager strategies on their integration of ESG factors, and active ownership (voting and engagement), providing clients with a consistent and robust way to evaluate how managers approach ESG and active ownership and assess how this contributes to investment outperformance.
Reaching the June 2014 milestone of 6,000 ESG-rated strategies takes Mercer that much closer to full ESG ratings coverage for all rated strategies across geographies and asset classes.
When Mercer researchers review a strategy, they will determine an appropriate ESG rating. This rating sits alongside the traditional alpha ratings (A, B+, etc.) and is considered alongside all other relevant factors. Maintaining such ‘parallel’ ratings:
Provides a unique ESG marker for the growing client demand for an independent assessment of current or prospective ESG integration and stewardship practices by managers.
Each rating is a qualitative assessment of the depth of ESG integration throughout a strategy’s process, following Mercer’s Four Factor Framework.
There are four ESG ratings categories ranging from ESG1 (the highest rating) down to ESG4 (the lowest rating). For a strategy to be assigned an ESG1, the investment team must have demonstrated market-leading capabilities in integrating ESG factors and active ownership in some or all of the four factors. An ESG4 undertakes little or no integration of ESG factors or active ownership into core processes.
Approximately 10% of ESG-rated strategies receive the highest ratings of ESG1 and ESG2, and the chart below shows the range of ESG integration across the major asset classes:
This distribution of ratings has remained relatively consistent since Mercer started evaluating ESG integration in 2008 and as the number of strategies evaluated has grown. We could apply softer standards and award a larger number of ESG1 and ESG2 ratings, but our intention is to distinguish those strategies that, in our opinion, are leading the way. The fact that the percentage hasn’t moved suggests that the industry has considerable room for improvement, though there continues to be innovation and curiosity from managers across asset classes and regions.
Mercer’s approach to evaluating ESG integration into core investment processes discourages ‘box ticking’ or prescribing a ‘one size fits all’ model. Rather, we look for an indication that managers have made an effort to integrate ESG factors into their alpha generation process as well as beta enhancement by exercising their ownership rights.
Whilst practices vary, highly-rated strategies often have the following common features:
Mercer can help you answer these five critical questions:
As an asset owner, you need to ask yourself a few more:
Mercer can help you answer these questions. Talk to your Mercer consultant to learn more.