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What is Responsible Investment?
Responsible Investment (RI) describes an
investment process that incorporates an active consideration of
environmental, social and corporate governance (ESG) factors within
investment decision making and ownership practices. It is driven by the
growing recognition among investors that responsible corporate behaviour
can have a positive influence on the financial performance of companies – particularly over
the long term. Investors who are aware of
all factors that could affect investment performance are better placed to manage
risk and generate value.
The evolution of Responsible Investment
RI has evolved from its roots in ethical
investment, to a much broader field, including: sustainable investment;
responsible investment; and shareholder engagement and activism.
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"First generation" was about negative screening
(for example, excluding tobacco companies from portfolios). This was
called "socially responsible" or "ethical"
investment.
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"Second generation" evolved to include elements
of positive screening, whereby "good" companies within each sector were
rewarded.
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"Third generation" responsible investment is
based on the philosophy that ESG or extra-financial criteria (for
example, human capital, environmental, social and corporate governance
factors) can have a positive affect on long-term corporate performance.
Responsible investors should consider these factors within their
investment analysis and shareholder engagement activities.
Mercer's
Responsible Investment
In 2004, Mercer formally launched a global business
unit focused on RI and ESG issues, after years of providing advice to
clients on these topics. Headquartered in Toronto, this unit now employs
fifteen dedicated professionals in six offices around the globe. We work
directly with leading responsible investors to develop cutting edge
strategies and implementation plans. As well, our consulting work is
increasingly undertaken in conjunction with colleagues from our investment
consulting business so that we can provide truly integrated solutions to
Mercer clients. To date, we have provided RI advice to national
pension plans, corporate plan sponsors, foundations, industry bodies, and other
significant institutional investors from around the world. Our team works
with investors to make better investment decisions within
a fiduciary framework: to enhance expected returns while managing risk
and cost.
Why are institutional and corporate investors
taking action?
 Environmental,
social and corporate governance (ESG) factors can be financially
material
| Where ESG factors were once considered
outside the realm of conventional investment decision making, they
are now accepted as having a potentially material impact on
financial performance and should therefore be embedded within the
investment process. |
RI policies are consistent with good
governance | Having a process in place that ensures
financially material ESG factors are captured within the investment
process goes hand in hand with good
governance. |
Lengthening the investment horizon enhances
long-term value |
Increasingly, investors are concerned
about “short-termism” within investment research, decision making and
performance monitoring. A balance between capturing and monitoring
short-term gains while protecting or enhancing long-term value needs
to be established. |
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Active ownership protects and strengthens
investments |
Efficient capital markets are supported by
high-quality relationships between owners and the entities in which
they invest. Investors are increasingly utilizing active ownership
tools, such as proxy voting, corporate dialogue and collaborative
engagement, to protect and enhance shareholder
value. |
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