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Contact: Craig Metrick
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Building a responsible investment portfolio


Written by: Craig Metrick

 

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Investors sometimes tell us that there are not enough responsible investment (RI) products in the market to build an institutional quality portfolio that is diversified across asset classes with reasonable fees, and competitive risk adjusted returns. For many investors, we would beg to disagree. Consider the following:

 

  • According to the US Forum for Sustainable and Responsible Investment, as of 2010, there were 250 socially screened mutual fund products in the US, with assets of $316.1 billion. By contrast, there were just 55 SRI funds in 1995 with $12 billion in assets.

 

  • A review by Morningstar and Vigeo (a corporate social responsibility ratings agency) counted 879 European funds, while assets under management rose 41 per cent to €76bn ($107bn) from €53bn in the 12 months to June 2010.

 

  • For an article in 2010, Mercer estimated that there were over 1000 funds focusing at least in part on environmental themes, including about 500 in cleantech private equity, 100 carbon funds, and about 100 green hedge funds, plus “green” themed listed equity, infrastructure, fixed income, and property funds. 

 

Yes, there may be caveats in certain vehicle types or for investors that want to focus on a particular theme or geographic region, but by and large, most investors can get what they need from high quality managers with reasonable fees. And the better news is that the universes keep on growing and new approaches continue to be developed.

 

Mercer has been evaluating RI funds for clients for several years. As the number of RI funds proliferated we began to develop and track subcategories of RI funds. We currently track 9 distinct RI universes within our Global Investment Manager Database.

 

There are many different approaches to responsible investment. Some investors pursue an approach based on their organizational mission (peace, environmental conservation, etc.) while others believe that environmental, social and governance (ESG) issues pose serious investment risks that need to be actively managed, and still others are pursuing unique investment opportunities through ESG issues. These approaches are not mutually exclusive and are often practiced in tandem.

 

With a broad client base, Mercer has organized its research, advice, and tools to support all of these approaches. For clients with mission-based guidelines or interests, Mercer tracks and researches socially responsible investment strategies across asset classes. Traditionally these strategies have been most prevalent in the listed equity asset class. However, more investment strategies with a social or environmental mission are emerging in fixed income (i.e. TIAA-CREF, SSGA) and private equity (Sarona, SJF). To adjust to these changing times, Mercer has established research universes in many of these areas.

 

Additional support for investors is provided through our ongoing due diligence process. A few questions to managers can provide valuable insight into how they address ESG issues for investors. Mercer has included questions in our database so that managers' views can be explored by clients and consultants at the earliest stages of due diligence. Examples of questions include:

 

  • Does this investment strategy consider ESG issues as risks or investment opportunities?

 

  • If this strategy is an SRI or sustainability “branded” product, which specialist features or types of investors does this strategy target?   

 

For investors that wish to manage ESG risks in their existing portfolio, Mercer has developed an ESG rating system for managers. This allows clients to monitor ESG considerations within their existing portfolio, which can mitigate the need to search for managers for specific ESG-related mandates. ESG ratings can be used to help select new managers, monitor existing managers or benchmark managers’ performance on ESG integration versus peers. Mercer has assigned ESG ratings across asset classes and geographies and more than 5000 ratings have been assigned to date.

 

Additionally, Mercer believes that ESG issues offer investors opportunities to take advantage of growth opportunities in sectors focused primarily on environmental issues. There is a wide array of strategies focused on capitalizing these opportunities. Some focus on clean energy or water or a concentrated selection of sectors related to environmental and resource issues. Others include companies that develop environmental solutions but also include companies that are the "most sustainable" companies in their sector according to the managers' definition and process. While this universe is expanding quickly, it is still relatively small, though diversified. Mercer provides coverage of these strategies through its Global Sustainability Themed category in GIMD. While this designation is useful to begin the search and selection process, further due diligence and analytics of the manager’s process as well as the client’s portfolio and objectives is necessary to determine whether a more concentrated sector strategy or a more diversified sustainability strategy is the right fit for the client.

 

While many of these strategies have reasonable track records, in the US and other regions around the world, these strategies are new for many institutional consultants and investors. Mercer and others are endeavoring to provide proactive coverage of these types of investments to serve the range of investors that are beginning dedicated responsible investment programs or inquiring as to how to integrate these issues and strategies across asset classes.

 

We encourage you to talk to your consultant about these investment strategies and the analytics which would enable you to make an investment decision. We believe that in many cases investors will find these opportunities compelling or, at the least, interesting and worthy of consideration. Mercer will continue to expand its coverage into impact investing strategies and responsible investment managers focused on alternative investments in order to continue serving client demand. We will continue to update our clients and the industry on our progress.

 


Footnotes

1

See The Forum for Sustainable and Responsible Investment for more information

2

SRI funds popular in Europe (accessible as registered content)

3

Environmental investing: Key issues when hiring managers 

4

Mercer's ESG ratings update - 5,000 and counting  


Mercer is a leading global provider of investment consulting services, and offers customized guidance at every stage of the investment decision, risk management and investment monitoring process. We have been dedicated to meeting the needs of clients for more than 30 years, and we work with the fiduciaries of pension funds, foundations, endowments and other investors in some 35 countries. We assist with every aspect of institutional investing (and retail portfolios in some geographies), from strategy, structure and implementation to ongoing portfolio management. We create value through our commitment to thought leadership; world-class, independent research; and top-notch consultants with local expertise.

IMPORTANT NOTICES

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References to Mercer shall be construed to include Mercer LLC and/or its associated companies.
This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer's prior written permission.
Opinions – not guarantees
The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer’s ratings do not constitute individualized investment advice.
Not investment advice
This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

Mercer universes: Mercer’s universes are intended to provide collective samples of strategies that best allow for robust peer group comparisons over a chosen timeframe. Mercer does not assert that the peer groups are wholly representative of and applicable to all strategies available to investors.

The value of your investments can go down as well as up and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments, such as securities issued by small capitalization, foreign and emerging market issuers, real property and illiquid, leveraged or high-yield funds, carry additional risks that should be considered before choosing an investment manager or making an investment decision.

Investment advisory services provided by Mercer Investment Consulting, Inc.

 


BUSINESS CONTACT


 Craig Metrick 


+1 212 345 1407


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