Mercer Investment Consulting introduces a new screen

Institutional clients of Mercer Investment Consulting Inc. will have another screen at their disposal as it adds environmental, social and corporate governance factors in evaluating investment managers. A "growing number of investors believe that ESG issues can have an impact on the earnings of portfolio companies and, therefore, on investment performance, and so should be integrated into investment analysis" of investment managers, according to a Mercer statement.

The new ESG factors will "stand alongside" existing criteria Mercer uses to evaluate money managers for clients, said Jane Ambachtsheer, global head of socially responsible investment, based in Toronto, who is leading the evaluation effort for Mercer. The ESG factors "will not have a formal role in the rating of investment managers," she added, but will instead serve as an additional screen of managers for clients who wish to use it.

In the past year, Mercer has evaluated 30 U.S. and U.K. global managers, whose assets total $12 trillion, she said. Each manager ranges in size of assets under management from $134 billion to more than $1 trillion. Mercer expects to evaluate 70 more managers based in the U.S., Canada, Australia and Europe by the end of year, she said.

"The reality is some investors feel ESG is important and other investors feel it is less important," Ms. Ambachtsheer said. "Now we have the research to help clients look at these areas" in money management firms.

She couldn't say what percentage of Mercer clients are interested in ESG evaluation.

Mercer was drawn into providing the new evaluation factors by the growing number of institutional investors who believe ESG issues can impact corporate business and investment performance and thus should be more integrated into investment analysis.

Interest comes from public and union pension funds, endowment funds, and faith-based institutions, she said. She couldn't say why corporate pension funds haven't expressed interest.

Mercer evaluated managers on their resources and processes for:

• voting and engagement on corporate governance issues;

• voting and engagement on environmental and social issues; and

• integration of ESG issues into investment decision-making processes.

In all, 11 of the managers Mercer evaluated demonstrated well-above-average capabilities on voting and engagement on corporate governance issues, while three showed well-above-average capabilities on voting and engagement on environmental and social issues and four showed well-above-average capabilities on integration of ESG issues into investment decision-making, according to Mercer's findings.

Two managers were able to demonstrate capabilities on the corporate governance issues, while five were not able to demonstrate capabilities on the environmental and social issues and six were not able to demonstrate capabilities on integration of ESG into the decision-making process, the Mercer evaluation found.

Falling between well-above and less-acceptable capabilities were 17 managers for corporate governance, 22 for environmental and social issues, and 20 on integration of ESG into the decision-making process.

The higher the evaluation, the more staff money managers commit to ESG, the report found.

For managers, "it's the first time they've been systematically asked for this information" by Mercer, Ms. Ambachtsheer said.

A separate effort by a coalition of major European pension funds and money managers, called the Enhanced Analytics Initiative, seeks to promote investment research in non-traditional issues that could impact corporate value.

The Enhance Analytics Initiative serves as a basis for members to allocate part of their brokerage commissions as an incentive to brokerage firms that are effective at analyzing such non-traditional research areas as corporate governance, environmental, employment and public-health issues and integrating them into their mainstream reports.

At Mercer, Ms. Ambachtsheer said: "Many managers weren't surprised (about the Mercer evaluation) because ESG (factors) are increasingly talked about by institutional investors."

"ESG criteria can have an impact on earnings of companies and therefore on investment performance," according to a Mercer report. Investments that have strong ESG capabilities can use the information, along with other analysis, "to avoid or short companies with significant ESG," or "generate opportunities for higher returns," among other uses.