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.
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.
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.
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
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.
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.
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
© 2020 Mercer LLC. All rights reserved. References to Mercer shall be construed to include Mercer LLC and/or its associated companies.
The document constitutes a marketing communication. This document is issued by Mercer Limited. Mercer Limited is authorized and regulated by the Financial Conduct Authority.
Registered in England and Wales No. 984275. Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU.
This document contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission. The document is for professional investors only. The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Mercer’s ratings do not constitute individualized investment advice. Mercer Passive Sustainable Global Equity UCITS CCF is a sub-fund of Mercer UCITS Common Contractual Fund, an Irish-domiciled UCITS umbrella fund authorised and regulated by the Central Bank of Ireland. The Sub-Fund may be subject to sudden and large falls in value, and therefore the investor could lose the total value of the initial investment.
All documentation related to the funds, including Prospectuses and Key Investor Information Documents, where relevant, and information on costs and charges, can be found on https://investment-solutions.mercer.com/#generalfundinformation. Funds are only available for sale in jurisdictions where they have been approved for distribution, and translated documents are available where required on the above website. Mercer relies on third-party information for external funds and is not liable for the accuracy of such information. This document may also include information on certain funds either within or outside of the Mercer fund range.
Past performance may not be a reliable guide to future performance. Past experience nor the current situation are necessarily accurate guides to the future growth in value or rate of return. The value of your investments and any income from it may fall as well as rise and you may receive back less than the amount invested. There is also a currency risk involved in investing in assets which are in a foreign currency. Changes in exchange rates may have an adverse effect on the value price or income of the product. The levels and basis of, and relief from, taxation can change. Where the information refers to a particular tax treatment, such tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Mercer does not give advice on tax related matters. Please consult your own tax adviser. For the most recent approved ratings of an investment strategy, and a fuller explanation of their meanings, contact your Mercer representative. Any forecasts made are not a reliable indicator of future performance.
This material does not constitute advice or an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.
For conflicts of interest and other corporate policies, please see https://investment-solutions.mercer.com/global/all/en/investmentsolutions-home/corporate-policies.html
All data as at dates specified and source is Mercer unless otherwise stated. This document may contain information on other investment management firms. Such information may have been obtained from those investment management firms and other sources. Mercer research documents and opinions on investment products (including product ratings) are based on information that has been obtained from the investment management firms and other sources. Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.