September 28, 2020

Q&A with Jan-Hein and Kate, investment solutions

Jan-Hein van den Akker, Equity Portfolio Manager, and Kate Brett, Head of Mercer’s European Responsible Investment team, were instrumental in the design and launch of the Mercer Passive Sustainable Global Equity UCITS CCF fund (“the fund”) This passive solution offers investors a new way to deploy capital towards more sustainably-managed companies and here they discuss Mercer’s approach to ESG investing and how this is embedded within the fund.

Q. Is responsible investment just about having an exclusion policy?

 

There is substantially more to our process than simply excluding companies from certain industry sectors. In terms of portfolio construction, we believe in a much more comprehensive approach of systematically integrating ESG factors into the decision-making process. We think this leads to better investment outcomes. In terms of climate change and the transition to a low-carbon economy, for example, it’s important to consider which companies are adapting to this change and those that are not. Exclusions and disinvestment can be a blunt tool and so care is needed – you may miss out on some good opportunities where companies are making great strides in this area. So, while we do use exclusions as one tool, they are not the only answer.

 

In terms of Mercer DSE, we expect all our sub-investment managers within our equity active and passive sustainable solutions to look at how companies are adapting to ESG pressures and opportunities. For example, are they moving towards cleaner energy and are their revenues becoming greener? We also strongly believe that effective stewardship is beneficial and require our sub-investment managers to have policies on voting and engagement – as a shareholders they can help influence the path a company takes over time. We therefore expect our managers to vote on all shareholder proposals that arise at EGMs and AGMs. We track the managers’ responses, review these on an annual basis and then give feedback on their policies. This engagement typically results in significant improvement to the managers’ voting record and disclosure over time.

Q. How do you think climate change will impact portfolio returns as we move forward?

 

We have considered the impact of climate change on investment outcomes for over a decade. Our most recent research, Investing in a  time of climate change – the sequel has focused on three specific scenarios – a 2⁰C, 3⁰C and 4⁰C average warming increase on preindustrial levels over three timeframes (2030, 2050 and 2100). A key conclusion is that investing for a 2°C scenario is both an imperative and an opportunity. This is because for nearly all asset classes, regions and timeframes modelling from our Investing in a  time of climate change the sequel suggests, a 2⁰C scenario leads to enhanced projected returns versus 3⁰C or 4⁰C and therefore a better outcome for investors.

 

In the fund, this conclusion has led us to exclude from the portfolio the worst offenders from a climate change perspective. Importantly, the index is tilted the index to have greater exposure to those companies which are transitioning to a low-carbon world and which have more exposure to green revenues. Conversely, it allocates away from carbon intensive companies and those that may suffer under a re-pricing based on our expectation of increased regulation in this area.

Q. Can you tell us more about how ESG factors are integrated into the management of the fund?

 

Following an extensive due diligence process, we appointed Legal & General Investment Management “LGIM” as sub-investment manager for the fund. LGIM have exceptional credentials in the area of voting and engagement and has achieved an ESGp1 rating4 (Mercer’s highest rating) for their high levels of ESG integration. The fund is a passive solution and LGIM has also achieved an A-rating as a passive manager from our research team.

 

The fund tracks the Solactive Sustainable Global Developed Equity Index. This is a subset of the wider Solactive GBS Developed Large & Mid Cap Index, which comprises approximately 1,600 companies. An ESG screening process results in the exclusion of over 330 stocks – these are companies and activities which do not reflect certain sustainability values. Every company that successfully passes through this screen is then quantitatively assessed by LGIM on 28 ESG factors. Each stock’s weighting within the index is based on its aggregate ESG score.

 

The resulting portfolio gives investors broad exposure to global equities but with a significantly reduced carbon footprint. We calculate that the underlying exposures produce 75% less emissions when compared to a broad market benchmark such as the MSCI World Index5

Q. What makes Mercer a leader in responsible investment?

 

Our dedicated Responsible Investment team was established in 2004 and so we have a long history of expertise in this area. Over this time, responsible investment has become fully ingrained within our DNA – the integration of ESG considerations into our investment process is one of our core beliefs. We are renowned for our perspectives1 and thought leadership on ESG-related topics. Indeed, we were the original consultants to the Principles for Responsible Investment PRI when this initiative was established in 2005/06. We are very active participants in the development of international standards and a wide range of other RI initiatives.

 

Through our global consulting business, we have advised investors on all aspects of responsible investment since the formation of our 21-strong RI team2. This experience informs the approach taken by Mercer Delegated Solutions in Europe (DSE), which implements our beliefs on sustainable investment within our own fund solutions3. These are managed by third party managers and, as a manager-of-managers, we believe that the depth and breadth of our manager research is highly valued by our clients. We rate approximately 4,500 different strategies – both active and passive – on their ESG credentials and we set out a number of polices that we expect our sub-investment managers to follow.


Q. Finally, do you think investors will allocate more of their capital towards ESG strategies in the years ahead?

 

There is no doubt that investors are now demanding more sustainability-led investment solutions. We have seen plenty of interest in ESG strategies over the years but often this has not been reflected in actual allocations. This is now changing. Pressure for a more responsible approach is coming from lots of different angles – from end-investors, members, trustees, regulators and governments.

 

As climate change comes into sharper focus, environmental and social issues will be very important considerations for investors going forwards. Indeed, within The World Economic Forum’s Global Risks Report 2020, all of the top five risks in terms of likelihood were environmental-related risks. If we are to collectively achieve he aims of the Paris Climate Agreement, investors will need to shift allocations to have more sustainable outcomes over this coming decade. In practice, this means allocating to sustainability-themed strategies, where the emphasis is on companies that explicitly provide solutions to social and environmental challenges. As such, we believe the Mercer Passive Sustainable Global Equity Fund offers investors a compelling way to manage their allocation to equities while taking climate change into account.


Kate is a Principal in Mercer’s Wealth business and leads Mercer’s Responsible Investment team in Europe.

 

Kate has extensive experience of working with clients to ensure sustainability and Environmental, Social and Corporate Governance (ESG) issues are reflected in their investment strategies. Kate advises a broad range of clients, including pension funds, endowments, foundations and insurers on sustainability trends, regulatory developments, climate change, stewardship and impact investing. 

 

Kate is responsible for developing intellectual capital across a range of responsible investment topics and has been the author and co-author of a number of recent reports and papers, including “Resilience - Lessons to Scale Responsible Investment” (2020) in partnership with the UK-China Green Finance Centre and “Investing in a Time of Climate Change” (2019, 2015).

 

Kate has over 15 years’ experience in the investment industry and joined Mercer in 2009. 

 

Kate holds a Master’s degree in Theoretical Physics & Mathematics from the University of St Andrews and is a CFA charterholder.

 

 

Jan-Hein van den Akker joined Mercer's investment solutions Business as a Portfolio Manager in August 2006. 

 

He is responsible for fund manager selection, monitoring and blending of all equity investment products. Jan-Hein works with several of Mercer’s large clients on their bespoke investment solutions. He also spearheads the integration of ESG in Mercer’s fiduciary solutions. Prior to his current role, Jan-Hein was a Fund Manager and subsequently Director and Head of Manager Research at Irish Life International Multi-Managers. 

 

Jan-Hein graduated from Tilburg University, the Netherlands, with an honours degree in Economics. He also holds a Masters degree in Finance from the same university. In 2004 he completed an honours MBA at Dublin City University.



 


Important notices

 

1 Mercer Recognized for Firm-Wide and Individual ESG Investment Consulting Excellence,” available at https://www.mercer.com/newsroom/mercer-recognizedfor-firm-wide-and-individual-esg-investment-consulting-excellence.html

 

2 As at June 2020

 

3 While ESG Integration forms part of the overall Mercer Investment process, it is not implemented equally across all services and products. For full information see the Mercer Delegated Solutions Europe Sustainable Investment Policy

 

4 Mercer’s Guide to ESG Ratings  (https://www.mercer.com/our-thinking/mercer-esg-ratings.html)

 

5 As at December 2019. Source Barra

 

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