Passive equity assets represent a significant portion of the investment industry, and this portion continues to grow each year. Although passive managers cannot express their views on particular companies by purchasing or divesting stocks, they are in a position to engage with, and positively influence, companies on a range of environmental, social and governance (ESG) issues. The long-term investment horizon of passive managers provides the opportunity for ongoing and higher-quality conversations with company management across a range of topics, including ESG issues.
Passive managers are increasingly gaining market share relative to active managers, and now own significant portions of the broad equity markets. For example, almost 40% of US equity assets under management are held in passive vehicles, more than twice the level from about 10 years ago.
In 2014, Mercer started formally reviewing and rating the largest passive managers on their active ownership activities, with the introduction of our environmental, social and corporate governance passive (ESGp) ratings.
Our approach focused on understanding the voting and engagement process, the resources required to implement stewardship responsibilities, internal initiatives to promote and enhance ESG integration, and the level of firm-wide commitment and industry collaboration that the managers undertake. With these factors in mind, we assessed the extent to which these managers were exercising their ownership responsibilities.