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February 15, 2012
Only 9% of Fund Managers Incorporate ESG Factors
    by Robert Kropp

Mercer's evaluation of environmental, social, and corporate governance uptake by fund managers reveals that there is considerable room for improvement in how they communicate ESG integration to investors.

Mercer has been ranking fund managers on their incorporation of environmental, social, and corporate governance (ESG) since 2008. By November, 2011, the number of managers evaluated by Mercer had reached 5,000.

This week, Mercer published the most recent of its evaluations of ESG uptake by fund managers. While the numbers don't suggest a wholesale embrace of externalities—only nine percent of fund managers were ranked by Mercer as leaders in integrating ESG factors and active ownership—"There continues to be innovation and curiosity from managers across asset classes and regions," Mercer stated.

Mercer's criteria for ESG incorporation by fund managers include generation of investment ideas, portfolio construction, active ownership, and firm-wide commitment to ESG issues. While the majority of fund managers evaluated by Mercer are active in the equities space, private equity had the highest proportion of ESG strategies awarded Mercer's highest rankings. According to Mercer, the strong performance by private equity managers is "partly due to expanding coverage of renewable energy and cleantech funds within this asset class."

Signatories to the United Nations' Principles for Responsible Investment (PRI) outperformed most other fund managers, as 72% of those receiving Mercer's highest ranking have signed on to the Principles. Regionally, emerging markets and Asia-Pacific in particular were found by Mercer to have the highest rate of ESG incorporation. "We find this interesting as it appears to speak to greater demand for broad sustainability considerations in emerging markets, perhaps given population growth and demands on resources," Mercer stated.

Eleven percent of US-based managers received Mercer's highest rankings; 60% of them were given the lowest ranking, indicating to Mercer that they are "lagging across all of these issues with little indication of intention to improve practices in either ESG integration or active ownership practices."

"There are pockets of good practice and innovative approaches emerging amongst fund managers in terms of ESG integration and active ownership," Mercer concluded. "However, fund managers can still greatly improve how they communicate their ESG integration practices to investors."

Mercer pointed out as well that asset owners themselves could do better jobs of communicating their ESG priorities to their managers. This can be accomplished through such practices as formalizing ESG expectations into contractual agreements and performance metrics.

"For asset owners that seek to behave as long-term responsible investors, this is an opportune time to mobilize your power and progress the industry to the next level," Mercer advised.


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