Only 9% of more than 5,000 investment strategies achieve the highest environmental, social and governance (ESG) ratings, according to Mercer. Since 2008, Mercer has been assigning ESG ratings to investment strategies that span asset classes and geographic regions. Using a four-point scale, Mercer considers strategies earning a one or two as “highly rated.” The ratings reflect the degree to which portfolio managers integrate the consideration of ESG factors and use shareholder stewardship practices within the investment process.
“We were not surprised to see a relatively low percentage of strategies achieve top ratings, as our approach involves setting a high bar. We aim to identify truly market-leading capabilities in integrating ESG factors and pursuing active ownership,” said Andrew Kirton, Mercer’s global chief investment officer. “There is still much work to be done by the investment community to fully integrate responsible investment practices.”
Of the 5,175 strategies assigned ESG ratings, 57% are in listed equities, 20% in fixed income and the remaining 23% across real estate, private equity, hedge funds and others. Private equity has the highest proportion of highly rated ESG strategies, while hedge funds and fixed income had the fewest. From a geographic perspective, emerging markets and Asia-Pacific have the highest proportion of top ratings, while Canada has the least.
Strategies that achieve the highest ratings tend to share the following common features:
- a demonstration that ESG factors feature in investment teams’ decision-making processes and corporate culture;
- an effort made to build in some ESG factors into valuation metrics, using their investment teams’ own judgment about materiality and time frames;
- a long horizon and low portfolio turnover;
- ownership policies and practices that include sufficient oversight, integration with investment decision-making and transparency;
- 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;
- a demonstrated willingness to collaborate with other institutional investors to improve company, sector or market performance; and
- a commitment to ESG integration at the organization-wide level.