Mellon has made the deliberate decision to imbed ESG analysis throughout its investment processes rather than segregating these efforts in a separate team or division. The result is firm-wide, bottom up integration with a mandate from the firm’s senior management.
We integrate ESG considerations into our investment processes in three ways: research expertise, solutions and product strategies.
Research expertise: Our research expertise is the foundation for our investment processes. Each analyst and portfolio manager is responsible for identifying material, relevant ESG considerations in their space and applying these insights appropriately. In this way, ESG research is an integral part of our investment process. We believe that carving out ESG considerations as a separate and distinct step detracts from the rigor of our analysis and has the potential to skew or increase risk. Consequently, as part of their investment process, our analysts actively pursue information, including ESG-related and extra-financial information that will strengthen their investment theses. We rely on their expertise to determine the extent and consequences of ESG risks and opportunities within their coverage universes or portfolio construction mandates. For systematic and indexed portfolios, ESG information may also be included as a risk component and/or in our corporate engagements.
Solutions: We recognize that ESG integration is defined differently by different investors. Many issues, including expanded regulation, changes in public sentiment, geopolitical unrest, macro trends, demographic shifts, increased severe weather events, increased data access, as well as their combined underlying drivers, will shape corporate behavior and impact markets. Some of our clients want to promote or avoid specific causes or activities in their investments. We work with them to create portfolios that reflect their unique perspectives on ESG issues while also addressing their financial objectives. We pride ourselves on our ability to partner with our clients to meet and help them evolve their specific objectives.
Product Strategies: In areas where our research or solutions lead us to differentiated ESG approaches that have potential for broader appeal than a single client, we create specific products around these ideas. For example, our Carbon Efficiency Strategy grew out of a client’s desire to lower exposure to current carbon emissions while still approximating the return and risk profile of their indexed portfolio. This strategy, open to other investors, targets a tracking error to the index of less than 0.50% while reducing the exposure to carbon by over 50%. The design of this strategy deliberately and thoughtfully incorporates flexibility around underlying benchmark, tracking error and carbon reduction targets to facilitate customization should a client have differing benchmark and carbon reduction/tracking error objectives.
Our passively managed funds are the beneficiaries of our engagement and proxy voting activities.