(February 13, 2012) — Less than 10% of investment strategies attain the highest environmental, social, and governance (ESG) ratings, according to an analysis performed by Mercer’s Investments business.
“The focus on ESG factors as a way of managing risk is still a relatively young concept” said Jane Ambachtsheer, Mercer’s Global Head of Responsible Investment, in a statement. “Our ESG ratings methodology gives investors an additional lens through which to view portfolio managers, particularly how longer-term risks and opportunities align with their overall strategy and how ownership rights are utilized to see that strategy through.”
According to a release by the consulting firm, strategies that achieve the highest ratings tend to share the following common features:
1) A demonstration that ESG factors feature in investment teams’ decision making processes and corporate culture
2) An effort made to build in some ESG factors into valuation metrics, using their own judgment about materiality and time frames
3) A long-term investment horizon and low portfolio turnover
4) Ownership policies and practices that include sufficient oversight, integration with investment decision-making and transparency
5) For alternative assets, evidence of pursuing best practices in transparency and evaluation, monitoring and improvement of ESG performance as relevant for portfolio companies and sectors
6) A demonstrated willingness to collaborate with other institutional investors to improve company, sector or market performance
7) A commitment to ESG integration at the organization-wide level
Andrew Kirton, Mercer’s Global Chief Investment Officer, added that he was not surprised to see a relatively low percentage of strategies achieve top ratings, as Mercer’s approach “involves setting a high bar”.
He added: “There is still much work to be done by the investment community to fully integrate responsible investment practices. We would expect the number of highly rated strategies to increase over the next few years as more and more investment professionals come to recognize the sound investment and competitive reasons for active ownership.”
In June, a survey by the firm found that the vast majority of pension funds, foundations, and asset managers view climate change as both a risk and an opportunity. Overall, the survey found that 98% of pension funds and foundations and 87% of asset managers believe that global climate change poses risks but also offers opportunities. It also found that 57% of pension funds and foundations and 80% of asset managers make specific reference to climate change risk in their investment policy.