Mercer Investments is using its deep insurance and environmental, social and governance (ESG) skills, contacts and processes to evolve its tools for advising clients on investment risk assessment, analysis and reporting – a move that reflects the evolving landscape for risk faced by investors.
Partner and global head of responsible investment at Mercer, Jane Ambachtsheer, said the landscape for risk includes factors such as resource scarcity, climate risk, an ageing population and a growing population, and so reliance on past performance in risk assessment is no longer adequate.
Mercer looks at the importance of complexity economics and how risk reporting is being influenced by the changing nature of risks, and the interconnectedness of risk.
In the World Economic Forum’s 2015 Global Risks report, which highlights the most significant long-term risks by drawing on the perspectives of experts and global decisionmakers, water crises were the greatest risk facing the world.
Other top risks alongside that and interstate conflict in terms of impact are: rapid and massive spread of infectious diseases, weapons of mass destruction and failure of climate change adaptation.
Given this perspective, Mercer is now talking to clients about looking at risk management using seven different risk management tools to measure, manage and report on risk. Many of these focus on climate risk, stewardship and long-term investing to assess and manage total portfolio risk.
- ESG ratings. Mercer now has more than 6000 ratings at the strategy level across all products and asset classes.
An example of how this is being used is that Bloomberg, as a plan sponsor, in its defined contribution plan is white-labelling the ESG ratings and providing this information to employees for selecting funds.
- Mercer is increasingly looking at the security-level information for its ESG analysis. It will be announcing a security-level partnership soon.
- Mercer now assigns ESG passive ratings and believes there is not enough focus on the assets that are managed passively. It is focusing on asset owners challenging passive managers.
- In the UK and other countries where there is a stewardship code, Mercer is advising on and helping with assessing whether managers are compliant; it has a ratings system of green, amber and red on the code principles and stewardship overall.
- Mercer’s new study, Investing in a time of climate change looks at climate risk in terms of technology, resource availability, impact and policy (TRIP) and provides a quantitative measure for investors’ climate risk in their portfolios. Ultimately the assessment can calculate the basis point impact of climate change on the portfolio.
“Fiduciaries need to be aware of climate risk and where their exposure is, they can then tilt towards those things that do better,” Ambachtsheer says.
- Carbon footprinting. This is a risk tool to capture policy risk.
- Insurance tool to assess total portfolio risk of real asset climate risks.
“No investor I have come across has a map of the world with all their physical assets on it. The concentrations of risk are ignored,” Ambachtsheer says.
Mercer is collaborating internally with Marsh and Guy Carpenter to do a real assets environmental risk assessment using insurance tools.
“We will be using insurance tools to run risk analysis at the total portfolio level and property, infrastructure, timber and agriculture,” Ambachtsheer says.
Mercer is also doing a lot of work on long-term investing, and asking such questions as whether investors should be giving managers targets beyond relative benchmark performance.
“How do you behave like a long-term investor should be a standing item on the investment committee meeting [agenda],” Ambachtsheer says. “We aim to embed long-term thinking.”
World Economic Forum 2015 Global Risks report
Top 5 global risks in terms of impact
- Water crises
- Rapid and massive spread of infectious diseases
- Weapons of mass destruction
- Interstate conflict with regional consequences
- Failure of climate change adaptation