Briefly describe how you include ESG factors in your due diligence process for manager selection.
Mercer’s approach to ESG integration is referred to as the Pathway to Responsible Investing. It seeks to integrate ESG throughout the investment process, including manager selection and monitoring.
Key to how Mercer ensures ESG factors are included in the selection and monitoring process is our proprietary RI manager research framework, which results in an ESG rating [ESG1 (the highest rated strategies) to ESG4 (the lowest)] and narrative utilising Mercer’s four-factor rating system (Idea Generation; Portfolio Construction; Implementation (voting and engagement); Firm-Wide Commitment).
Since 2010 Mercer's Manager Research team has assigned an explicit ESG rating at the investment strategy level as part of the standard manager research process globally across asset classes (in the two years prior the RI team conducted firm wide reviews). These ratings are available to all clients as part of standard manager selection and monitoring services.
For a strategy to be assigned an ESG1 rating, the investment team must have demonstrated market-leading capabilities in integrating ESG and responsible ownership into the way they generate investment ideas, construct portfolios, implement responsible ownership practices (through voting and engagement), and the degree of firm-wide commitment to ESG issues. In 2014 Mercer also introduced its ESGp (passive) ratings for passively managed equity strategies, the ESGp ratings scale range from ESGp1 (highest) to ESGp4 (lowest)
As at December 2019, Mercer had assigned an ESG rating to more than 4,500 strategies, and we will continue to pursue ESG integration as important for fund manager strategies, particularly as more asset owners build ESG into their selection and monitoring criteria.