Mercer will integrate its proprietary environmental, social and governance (ESG) ratings across all of its manager-search and performance data, cementing ESG as a key investment consideration.
The consultant rates more than 20,000 strategies, oversees more than $5 trillion of assets under advice and has $60 billion in its multi-manager products.
Mercer has led the consulting industry on standalone ESG ratings and will now integrate those factors across its ratings process.
About 10 per cent of the strategies rated by the consultant receive an A rating, or recommendation status. Of these, 80 per cent have an ESG rating.
Separately it rates 5000 investment strategies on ESG factors, with 9 per cent receiving the top ESG rating.
Rich Nuzum, president and global business leader for Mercer Investment Management, says the move is a response to client demands, particularly from sovereign wealth funds, which want an objective approach to comparing strategies and asset classes over time.
“For managers, it encourages reporting on ESG but that is an indirect outcome. The main thing was we wanted an objective approach that applies across strategies,” he says. “This creates an incentive and dynamic around that.”
By providing the ESG research as part of its client communication, Nuzum says Mercer is enabling smaller clients – who may not be able to afford the dedicated resources necessary for ESG – to benefit.
Mercer has spent time and money on training its research analysts on ESG factors. While the consultant has a separate ESG research team that focuses primarily on policy and strategy, the ESG ratings are incorporated in the research process conducted by all analysts.
“The manager-research team integrates ESG into its research process, and we expect managers to do the same,” Nuzum says.
“ESG factors are different from financial-statement analysis but most analysts would also look at other things as well and many have been considering corporate governance factors for years. I don’t buy the argument for a second that a manager needs different skills to analyse ESG.”
He says many analysts have been considering ESG factors, such as political and regulatory risk, in their risk and return considerations for many years.
“There are lots of things that are not in financial statements that process needs to look at.”
Nuzum believes there is ESG alpha at the individual strategy level, but is also focused on a more universal ownership argument.
“Most clients own a proportion of the global economy. A focus on ESG factors can get management teams to take these externalities, such as treatment of employees or child labour, into account. If there is improvement at individual companies, the compounded effect is felt across overall GDP growth,” he says. “There is alpha at the individual strategy level but there will also be higher expected returns to most asset classes if universal owners get company management teams to behave better, everyone’s returns will go up. There will be a higher beta.”
Mercer looks at ESG ratings across the generation of investment ideas, construction of portfolios, implementation of active ownership practices through voting and engagement, and the demonstration of a firm-wide commitment to ESG issues.