The Mercer Super Trust was the only master trust awarded top marks for responsible investment in the recent Responsible Investment Association Australasia 2016 Superfund RI Benchmark Report. It was among the 12 top-rated funds out of 50 surveyed by the RIAA.
In the past five years, considerable advances in the way super funds implement responsible investment strategies and require their asset managers to do the same has moved responsible investment from the margins to the mainstream, the report notes.
We speak to Alexis Cheang, Principal of Mercer’s Responsible Investment team, to find out how Mercer’s commitment to environmental, social and governance (ESG) factors has made the Mercer Super Trust a market leader.
Alexis Cheang: Mercer’s definition of responsible investment is to be a good steward of the assets that are entrusted to us on behalf of our clients. This means being mindful of the ESG factors that can influence – both positively and negatively – the performance of the companies that we invest in. It also means using the opportunity afforded to us as asset owners and investment managers to encourage companies to adopt sustainable and responsible operating practices, which we do through our voting and engagement program.
Interviewer: What helped the Mercer Super Trust stand out in the Responsible Investment Index?
AC: The Mercer Super Trust’s Sustainable Investment Policy and Corporate Governance Policy are directly provided to our investment managers to reinforce what is expected of them. The reason we scored as well as we did, I think, is because we monitor how well these policies are being implemented by our managers. We survey our managers annually to determine how well they are integrating ESG into the investment process, and Mercer’s ESG ratings are considered as part of the investment selection process. On top of that we measure the carbon footprint of our listed equity funds and review this as part of our management processes as well as our manager engagement discussions. We identify room for improvement by spotting those who are not doing much so we can encourage them to improve.
Interviewer: The report notes that responsible investment is moving from the margins to the mainstream. Why do you think that is?
AC: There are probably three main drivers. One would be a recognition that ESG factors can be material and if they are, then fiduciary duty obliges you to consider them. Mercer’s report in 2015 highlighted the materiality of climate change on investment portfolios and there has been some legal opinion published suggesting funds that fail to consider climate change risk in their investments could be in breach of their fiduciary duty. Secondly, there has been a shift across superannuation about the role of super funds in establishing sustainable and stable financial markets rather than solely delivering good returns for their members. They’re now starting to say “what kind of society and environment will our members be retiring into, and do we have a role to play in shaping that future?” Thirdly, there’s peer awareness. Super funds have always been peer aware in terms of performance but they’re now paying more attention to what their peers are doing in the ESG space and asking more questions about why they have taken that approach.
Interviewer: What are the challenges for responsible investing?
AC: The short answer is that companies, like people, are complex and imperfect. For example, AGL is the biggest carbon emitter in Australia but it is also the largest producer of renewable energy in Australia. So, you have a company that’s a serious driver of the carbon footprint of any portfolio but it’s also providing a leading solution to that same problem. It’s a company in transition and it expects to have shut all its coal-fired power plants by 2050. But 2050 is still a fair while away so you need to make a judgement about the companies you’re investing in as to how comfortable you are with the pace of change and with their strategy for change.
Interviewer: Is this changing the level of engagement you have with the companies you invest in?
AC: I was recently at an investment management consultants conference that had a session entitled “How deep do you dig?” If I’m a director of a superannuation fund, is it really my responsibility that a supplier is using a sub-supplier that’s acting unethically? How far am I really expected to dig and when does the buck get passed to somebody else? It wouldn’t be reasonable to expect a superannuation fund to apply pressure directly to that second or third-tier supplier but if you can raise the issue with the company you’re invested in, then there’s that influence downward and it may have an impact. I've seen a few examples of that in my career where it’s worked fairly well. For the Mercer Super Trust, we expect our investment managers to engage with companies held in our portfolio on important ESG issues.
Interviewer: How do you measure responsible investment outcomes?
AC: The main measurements we look at right now – and we’re open to new ideas – are the managers’ ESG rating, the carbon footprint of the strategies, and the survey responses. We apply a scoring mechanism to the survey responses, so we’re measuring and monitoring based on qualitative and quantitative measures. Then there’s the voting results: how are our investment managers voting and engaging around the vote? There is capacity to bring in a few other measures but I think we want to make sure we are acting on the measures we have and assuring ourselves that they are the right ones.
Interviewer: What are the main elements spurring responsible investment strategies?
AC: The key point is that we need to be clear with our clients what we’re doing on their behalf because we are a master trust and our clients have to report to their own members and their own stakeholders. We need to equip and support our clients as they engage with their members and stakeholders. We need to be able to let them know about the carbon footprint of their funds, the average ESG ratings of the products they’re invested in, and how voting went at meetings that may be important for them.
Interviewer: Where in the hierarchy of stakeholders should people really be engaged?
AC: I would say at the board level. Mercer is the trustee for all these other clients within the Mercer Super Trust, and we do have good engagement from the board on these factors. But I think if we want to go further, the direction needs to come from the board. It also needs to come from our clients – if they have specific needs or concerns, they should feed it back through their relationship managers. This will then give the board a greater indicator of what’s important to our customers and what they expect from us as their service provider.