· Mercer launches first of its kind ESG ratings scale (ESGp) for passively managed equity strategies
· No managers receive top rating – emphasis remains on corporate governance issues
· Ratings have been completed for seven passive fund managers, including five of the world’s largest
London, 23 February 2015
Investment managers could do more to get a handle on environmental, social and governance (ESG) risks within passively managed equity strategies, according to analysis done through Mercer's new rating process for passive investment strategies (ESGp). With ESGp ratings, Mercer aims to review and identify clear leaders in ESG integration through voting and engagement amongst passive investment managers. The ratings will assist Mercer’s clients in making better informed selections of managers for their portfolios by ensuring that they consider and engage with environmental, social and governance risks, as well as financial ones. So far Mercer has rated 90% of its clients’ passive equity strategy holdings according to a four point scale, however none received the highest rating.
“Institutional investors are increasingly aware of the positive impact ESG integration and active stewardship practices could potentially have on investment outcomes. However, so far the main focus and most of the data available, has been on actively managed strategies,” said Deb Clarke, Global Head of Investment Research, at Mercer. “Allocations to passively managed equity strategies continue to increase and so it is important for trustees and sponsors to recognise that ESG related risks are potentially present here as well. Our analysis shows that at least half of passive managers are well equipped to engage with companies they invest in on certain ESG areas, in particular on governance issues. However, they might all benefit from an increased focus on environmental and social issues.”
Mercer’s passive ESG rating (ESGp) assesses how well investment firms undertake their active ownership activities such as voting, engagement, industry collaboration and reporting. The four-factor framework focuses on four key aspects of responsible investment within a passive context, including: voting and engagement process, implementation and resources, ESG integration and internal initiatives (focus on ESG initiatives within the business), and industry collaboration/ firm-wide activities. Mercer uses a four-point scaled with ESGp1 signifying leadership.*
“Research, such as Dimson and Karakas’ ‘Active Ownership’, shows that successful engagements can lead to improvements in operating performance, profitability, efficiency and governance. Furthermore, a number of studies have shown positive links between firms with higher ESG ratings and better corporate performance,” said Sarika Goel, Investment Researcher in Mercer’s Responsible Investment Group. “We are also seeing rising expectations around investor stewardship and active ownership through, for example, John Kay’s review of the UK equity market. This review encourages investors to think and act over a long-term horizon as opposed to simply managing to short-term earnings expectations. Passive investors have a clear financial interest in the long-term welfare of companies they invest in, but they are unable to take direct action through buying and selling stocks as active managers do. As they can’t walk away from companies that underperform, engagement with companies should be a core function for investment firms that manage passive strategies.”
Notes to Editors
*Assessing overall quality of ESG/active ownership activities for passive managers using ESG-Passive (ESGp) rating scale of 1-4:
The new ESG-Passive (ESGp) rating scale will be used to assess and identify clear leaders in ESG and investor stewardship for passive managers. More detailed analysis provides an assessment on how well firms undertake their stewardship activities such as voting, engagement, industry collaboration and reporting. The process will incorporate the assessment of:
- Voting and engagement process
- Resources and implementation
- ESG integration and internal initiatives
- Industry collaboration and firm-wide commitment
Mercer’s ESGp rating scale:
ESGp1 – Leaders in voting and engagement across ESG topics, undertakes ESG initiatives at a global level
ESGp2 – Strong approach to voting and engagement across ESG topics, undertakes ESG initiatives at a regional level, with progress made at a global level
ESGp3 – Focus tends to be on voting and engagement on governance topics only, regionally focused and less evidence of other internal ESG initiatives
ESGp4 – Little or no initiatives taken on developing a voting and engagement capability, little progress made on other ESG initiatives
About Mercer
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in more than 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.