Demand forces managers to disclose SRI stance

Whether they want to or not, it appears investment managers are going to have to reconcile their position on socially responsible investing (SRI), now that one of the world’s largest investment consultants has decided to add environmental, social and governance factors (ESG) into its mainstream investment rating process.

The move by Mercer to include ESG factors in its ratings is a big step forward for SRI advocates, because the vast majority of large institutional investors consult companies like Mercer before making final investment decisions.

Jordan Berger, a principal with Mercer and head of responsible investment for Canada, says the step is necessary because client demand for ESG information on funds is becoming widespread. This is partly due to a greater environmental and social awareness, but also reflects a growing belief that ESG can improve long-term performance.

“Money managers, including some who are not known as being prominent supporters of responsible investing, are identifying climate change-related opportunities,” he says. “Other people are looking at the cost of energy. Those companies that have used a sectoral analysis in the past to reduce their use of resources are beginning to show some performance improvements. We are finding very innovative products by managers who may or may not take a position on climate change or another ESG issue, but are nonetheless looking to profit from them.”

Berger notes that Mercer’s current investment rating process will remain intact, but the company hopes to have ESG factors included as additional info on all their rated investments. The ESG factors will not affect the traditional investment ratings.

“We have a database of tens of thousands of investment strategies, of which I think about four to five thousand are rated by using our traditional rating process, which focuses on business development, idea generation, recruitment and turnover. We are trying to look beyond recent performance to what, in our opinion, are the long-term drivers in variability to exceed the benchmark and their peers,” Berger says. “Our existing manager researchers will be incorporating ESG questions in the analysis on an ongoing basis. Over time we hope to have all of our investment management strategies that we track rated on ESG grounds.”

Mercer has been researching the ESG practices of traditional investment managers since 2005, but Berger says today’s investment environment makes it possible to apply ESG ratings across the board.

“The other reason we are doing this right now is, frankly, it is significantly less controversial than four or five years ago to ask a mainstream investment manager what their position is on ESG issues,” he says.

Bob Walker, vice-president of sustainability at The Ethical Funds Company, thinks Mercer’s added weight to the SRI movement is great news.

“It enhances the credibility of what we are doing when you get to the point where large investment consulting firms start to include ESG into their ratings,” he says.

But Walker notes that as the SRI universe expands in Canada, it becomes more important to set guidelines on what it means to be an SRI investment company. Walker highlights that three of the big banks have all launched SRI offerings in the last year, and while they adhere to SRI principles, he believes the new players are not quite as comprehensive as an industry pioneer like Ethical Funds.

For instance, Ethical Funds is committed to shareholder action, something he says some newer players in the space have been reluctant to commit to as of yet.

Walker says North America is also lagging behind Europe in adopting more stringent SRI disclosure standards that will divide SRI investments into sub-categories. For example, you can have core-SRI funds versus broad-based SRI mandates.

As more funds look to adopt some sort of SRI factor to their mandates it does force companies to adopt strong ESG practices.

“We are at a place now where some companies are actually developing internal case studies and sharing them with us,” he says. “This is very good news because it allow us to expand our universe of investment choices.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(05/26/08)

Mark Noble