Few Investment Strategies Attain Top ESG Ratings

Of the 5,175 strategies assigned ESG ratings, 57% are in listed equities, 20% fixed income and the remaining 23% across real estate, private equity, hedge funds and others. Private equity has the highest proportion of highly rated ESG strategies, while hedge funds and fixed income had thefewest.  From a geographic perspective, Emerging Markets and Asia-Pacific have the highest proportion of top ratings, while Canada has the least.  

As one might expect, 58% of the ESG1-rated (the highest rating) strategies are “ESG” or “Sustainability” branded or thematic strategies, and 72% are managed by signatories to the United Nations Principles for Responsible Investment (PRI). Of the ESG2-rated (the next highest rating) strategies, a smaller percentage of strategies – 22% – are ESG or sustainability-branded. This means the other 78% are “mainstream” strategies which incorporate ESG into their analysis to make buy/sell decisions. PRI signatories manage 68% of the ESG2 rated strategies.   

According to Mercer, strategies that achieve the highest ratings tend to share the following common features: 

• A demonstration that ESG factors feature in investment teams’ decision making processes and corporate culture; 
• An effort made to build in some ESG factors into valuation metrics, using their own judgment about materiality and time frames; 
• A long-term investment horizon and low portfolio turnover; 
• Ownership policies and practices that include sufficient oversight, integration with investment decision-making and transparency; 
• For alternative assets, evidence of pursuing best practices in transparency and evaluation, monitoring and improvement of ESG performance as relevant for portfolio companies and sectors; 
• A demonstrated willingness to collaborate with other institutional investors to improve company, sector or market performance; and 
• A commitment to ESG integration at the organization-wide level. 

Since 2008, Mercer has been assigning ESG ratings to investment strategies that span asset classes and geographic regions. Using a four-point scale, Mercer considers strategies earning a 1 or 2 as “highly rated.” The ratings reflect the degree to which portfolio managers integrate the consideration of ESG factors and utilize shareholder stewardship practices within the investment process.  Ratings are assigned by members of Mercer’s manager research boutiques as part of the core research process.