Institutional asset owners are increasingly interested in behaving, and being encouraged to behave, as active owners of capital. They do so both to discharge responsibilities as owners, and to safeguard and potentially improve the long-term performance of underlying assets.

In addition, there is increasing evidence that environmental, social and corporate governance (ESG) factors can have an impact on the earnings of portfolio companies and therefore on investment performance ¹ . This has led a number of investors to seek ways to integrate ESG analysis into investment decision-making.

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New research

To meet the needs of our clients in light of these developments, Mercer Investment Consulting (Mercer IC) has extended its research of investment managers to assess practices in regards to three new factors:

1. Voting and engagement on corporate governance issues
   
2. Voting and engagement on environmental and social issues 
   
3. Integration of ESG issues into mainstream investment analysis

An overall score is determined by our researchers which reflects an investment manager’s performance across the three categories. This research assesses managers on a global basis and examines their practices across all of their investment products (i .e. it does not assess socially responsible investment (SRI) products).

The findings below reflect the results from the first phase of this research, which assessed 30 managers that we rate highly for their UK and/or global equity products. These managers range in size from $134 million to $1.6 trillion USD total assets under management with a bias towards managers with a majority of their assets based in the UK.

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First phase of research - initial findings

These ratings contain both absolute and relative elements. While we look for characteristic behaviour at each level, we also score manager performance relative to the universe. As the bar for these practices rises over time, our expectations at each level will also rise.

Table 1: Capacity of investment managers to integrate active ownership and ESG issues into the investment decision making process*

* Managers are scored according to their capacity and capabilities on each factor. Scores range from “++” for managers that demonstrate “well above average” capabilities, to “-” for managers that are not able to demonstrate an acceptable capacity in this area, with scores of “+” or “=”given to managers that fall somewhere in between.

Overall, managers show greater capacity and capability for voting and engaging with management on corporate governance related issues than on environmental or social issues, with only 7% scoring a negative for the former and 17% for the latter. On the positive side, 37% of managers scored the top rating for their voting and engagement practices on corporate governance, and 74% either + or ++. This compares to 50% scoring + or ++ for environmental and social factors.

Managers scored worst on their ability to integrate ESG factors into their mainstream investment decision process. 20% of managers scored negatively and 33% neutral, totaling 53% for combined negative and neutral findings. Only 13% of managers were allocated a ++ in this area.

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Further analysis of the results

Interestingly, there is no scoring bias demonstrated towards either large or small firms with our sample containing regional boutique firms as well as major international managers. There is a small geographic effect, with firms having a greater concentration of UK assets tending to achieve a slightly better overall rating.

Just as no relationship exists between firm size and scoring, there is also no correlation between firm size and the practice of purchasing external research, with firms small to large both purchasing external research and achieving positive ratings. As one might expect, there is a positive correlation between scoring and the number of staff resources committed to corporate governance and environmental/social factors.

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Regional biases

As the majority of the managers we assessed held the bulk of their assets in the UK this group of managers is likely to exhibit a positive bias towards active ownership and ESG-integration practices relative to investment managers internationally, given the prominence given to these issues in the UK.

Research is currently underway across managers in multiple regions, and we will publish subsequent findings on our website. We expect overall scores to decrease as the sample size increases, and as we take in regions that have given less attention to these issues.

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Reflecting on findings

In terms of voting activity, we identified notable differences in consistency of cross-regional voting practices. Systematic reporting activity is, for example, relatively scarce across the board. The study reveals that engagement work is typically undertaken by a combination of specialist SRI teams, central corporate governance groups, and mainstream analysts/portfolio managers. While investor networks and initiatives are commonly used by managers to collaborate on ESG engagement, associated memberships and collaborative methods vary greatly (this information is detailed in resulting research notes for each manager).

A number of elements are considered when assessing the integration of ESG analysis by managers, such as access to ESG research and mechanisms for integrating this within traditional investment decision making processes. Where SRI and corporate governance teams exist, they are increasingly integrating with mainstream analysts and portfolio managers (i.e. SRI research outputs become ESG mainstream inputs).

While increased availability of ESG research may signal wider demand from investors, current practices suggest there is still some way to go before this information is systematically integrated into investment decision making.

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Associated investor beliefs

The investors that seek to integrate active ownership and ESG factors within investment processes are often motivated by the following beliefs, corresponding to each of our assessment factors:

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Conclusion

Our research allows investors to understand the practices of their current investment managers, providing a means for them to undertake dialogue with them where such practices could be improved. It also facilitates the incorporation of active ownership and ESG considerations into the selection of future investment managers by allowing a long list of potential managers to be narrowed based on these criteria.

We believe our research will become an invaluable tool to investors interested in this area and may over time help to raise the bar.

Reference

Contact us to learn about your investment managers’ practices or discuss our research methodology.