Only 9% of 5,175 investment strategies received the highest environmental, social and governance ratings, according to an analysis by Mercer.
Private equity had the highest proportion of highly rated ESG strategies among the assets classes, while hedge funds had the fewest.
“We were not surprised to see a relatively low percentage of strategies achieve top ratings, as our approach involves setting a high bar,” Andrew Kirton, Mercer’s global chief investment officer, said in a statement about the analysis.
Using a four-point scale, Mercer considers strategies earning a 1 or 2 as highly rated, 3 as having positive signs of ESG integration but with room for improvement, and 4 as showing little if any leadership on ESG policies or practices and no communicated desire to improve, according to Craig Metrick, Mercer's U.S. head of responsible investment.
Of the private equity strategies evaluated, 26% received a 1 or 2 rating.
Only 2.4% of hedge fund strategies were rated 1 or 2.
Among other asset classes rating 1 or 2 were 9.1% of equity strategies; 3.8%, fixed income; 19.6%, real estate; 18.1%, infrastructure; and 13.9%, other.
“We would expect the number of highly rated strategies to increase over the next few years as more and more investment professionals come to recognize the sound investment and competitive reasons for active ownership,” Mr. Kirton said in the statement. “The way money is being managed is evolving. … We believe ESG analysis and active stewardship practices support this. In particular, active engagement with companies where performance is seen as wanting ought to have a complementing role in investment management, alongside the sale and purchase market disciplines.”
Jane Ambachtsheer, Mercer’s global head of responsible investment, said in the statement: “The focus on ESG factors as a way of managing risk is still a relatively young concept. Our ESG ratings methodology gives investors an additional lens through which to view portfolio managers, particularly how longer-term risks and opportunities align with their overall strategy and how ownership rights are utilized to see that strategy through. The separate ESG score allows clients to assess where their managers stand today, and provides a framework for thinking about where they would like see their managers get to in the future.”