Citing demand, Mercer to include ESG ratings in investor reports

Citing a growing interest in environmental, social, and corporate governance (ESG) from institutional investors, global consulting firm Mercer will include these factors in reports relating to fund manager search and performance.

Signatories to the United Nations' Principles for Responsible Investment (PRI) number over 1,000, with approximately $30 trillion in assets under management.

"Yet only nine percent of the more than 5,000 investment strategies we have rated achieve our highest ESG scores," stated Jane Ambachtsheer, the Global Head of Responsible Investment at Mercer.

An evaluation published by Mercer in February found "pockets of good practice and innovative approaches emerging amongst fund managers in terms of ESG integration and active ownership. However, fund managers can still greatly improve how they communicate their ESG integration practices to investors."

In the US, for instance, only 11 percent of fund managers received Mercer's highest rankings; 60 percent of them were given the lowest ranking, indicating to Mercer that they are "lagging across all of these issues with little indication of intention to improve practices in either ESG integration or active ownership practices."

In an effort to help improve the incorporation of ESG factors in the investment processes of fund managers, Mercer announced last week that it will include its ESG ratings in reports to clients addressing fund manager search and performance. "By including ESG ratings in our most frequent deliverables," Ambachtsheer said, "we are further enhancing Mercer's due diligence and our clients' ability to include ESG and active ownership considerations in the selection and monitoring of managers."

"A growing number of institutional investors are expressing an interest in ESG assessments," said Andrew Kirton, Mercer's global chief investment officer. "However, relatively few managers integrate these factors into their investment processes. Incorporating ESG as a key aspect of the search process will promote constructive dialogue with managers on ESG related issues and result in better overall outcomes."

According to Mercer, an advantage of its ESG manager research is its ability to access a larger pool of mainstream fund managers than specialized sustainable investment firms can. Its ratings, the firm states, include both fund manager policies and the practical implementation of those policies as well.

Mercer says its ESG ratings help asset owners compare fund managers across regions and asset classes, evaluate the evolution of managers' ESG practices and access examples of industry best practice.

The firm expects to include ESG ratings in its client reports by the end of 2012.

Photo of nest eggs in tree provided by dabjola via Shutterstock

This story originally appeared on Social Funds and is reprinted with permission.