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October 21, 2005
Institutional Investors Drive Research on Mainstreaming of SRI by Investment Managers
    by William Baue

A new line of research at Mercer Investment Consulting rates proxy voting, shareholder engagement, and analysis of environmental, social, and governance issues by mainstream investment managers.

When it comes to gauging the mainstreaming of socially responsible investing (SRI), investment consultants (ICs) are perfectly positioned to do so as they work at the nexus between the demand side (institutional investors) and the supply side (investment managers). Mercer Investment Consulting, self-described as the "world's largest consulting firm in our business," has begun analyzing and rating investment manager capacity to assess corporate environmental, social, and governance (ESG) performance and conduct active shareholder engagement and proxy voting.

"I don't know of any other consulting firm that is either doing this research or has a dedicated global SRI unit," said Jane Ambachtsheer, head of global SRI at Mercer, from her Toronto base.

Demand from Mercer clients, who are mostly mainstream institutional investors (as opposed to mission-driven institutional investors who are predisposed toward SRI), played a key role in the decision to pursue this project.

"The trend of mainstreaming SRI is being driven by more interest from institutional investors--they're the ones who are helping provide the catalyst for change," Ms. Ambachtsheer told "I think the most prevalent trend is a growing perception that ESG issues can impact investment performance."

"This is not so much translating into a growing interest in SRI funds--rather it's translating into increased interest from investors about how their currently-managed funds address these issues," she added. "What we've tried to do with this research is to provide a tool to use the traditional investment management approaches, but to have this additional lens through which to evaluate performance."

The Mercer SRI team rated 30 global investment managers in three areas: proxy voting and shareholder engagement on corporate governance issues and separately on environmental and social issues, as well as integration of ESG considerations into investment decision-making processes. Overall, firms rated best on governance voting and engagement, with 37 percent earning "++" ratings (well above average) and 37 percent rating "+" (above average). Only 10 percent of firms earned "++" ratings and 40 percent earned "+" ratings on environmental and social voting and engagement, while13 percent earned "++" ratings and 33 percent earned "+" ratings on integration of ESG issues into analysis.

The 30 firms covered rated manage more than $12 trillion in assets (with a bias toward firms with a majority of assets in the UK, though some of the firms are headquartered in the US), and range from smaller boutique firms (managing $134 million) to firms managing $1.6 trillion.

"Interestingly, there is no scoring bias demonstrated towards either large or small firms," said Ms. Ambachtsheer. "We looked at an organizational, global level, so the rating for a Capital or a Deutsche will in fact cover a large number of investment strategies--we're not rating separately how an investment manager behaves in these areas for their US large-cap versus their global."

The integration of ESG issues into mainstream investment manager analysis has the potential to drive significant change in the corporate world.

"Probably the biggest impact of mainstreaming SRI in terms of trying to advance the sustainability agenda is through putting pressure on corporations to disclose their behavior as relates to ESG considerations," said Ms. Ambachtsheer.

The results represent the first phase of an ongoing practice of ratings investment managers' ESG analysis and active ownership in response to demand from institutional investors. The bias toward UK-based assets will likely shift toward US-based assets as SRI mainstreaming gains momentum on this side of the pond.

"US plan sponsors have already contacted us about this research," said Ms. Ambachtsheer.


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