Ten years ago, Mercer established a team of consultants focused exclusively on providing advice on responsible investment to investment fiduciaries and practitioners. Jane Ambachtsheer, a partner in Mercer’s Investments business and an adjunct professor at the University of Toronto, has led this global team since its inception. Ambachtsheer, who in 2006 also served as a consultant to the United Nations in developing the UN Principles for Responsible Investment, reflects on the past decade of growth and change in the area of responsible investment.
Q: Responsible Investment has evolved substantially over the past 10 years. Tell us about its development and future outlook.
Jane Ambachtsheer: Responsible investment has undergone a remarkable evolution over the past decade and especially the past five years, and has become a priority issue for many mainstream investors worldwide. At Mercer, we view responsible investment as building on traditional investing with an extra layer of due diligence that incorporates environmental, social, and corporate governance (ESG) factors. For the majority of the organizations we work with, their first priority is to maximize risk-adjusted returns. Our work is to consider how ESG issues can contribute to stronger companies, more aware fund managers, and ultimately, more satisfied investors.
Q: Some have confused responsible investment with ethical investing. What exactly is, and is not, considered responsible investment?
J.A.: Responsible investment isn’t quite the same as ethical investing, which focuses more on aligning investors’ social objectives with their investment portfolios. Often, this involves avoiding investments in companies connected to perhaps alcohol, tobacco, or gambling, while possibly overallocating to companies with similar ethical guidelines as the investor.
For mainstream investors, responsible investment represents an overarching approach to investing that considers a wide range of ESG issues that are expected to impact a company, and hence capital market performance, over the long term. These factors may include population growth and demographic changes, such as consumption patterns; health and longevity issues; natural resource constraints, including water, fossil fuels, and climate change; and evolving public sentiment about and regulatory approaches to environmental and social issues.
For most of our clients, responsible investment isn’t about changing the world; it’s about understanding how the world is changing and how companies will be affected. It’s about understanding where future growth will come from and having access to it. It’s about a company’s, an investment manager’s, or investment committee’s role as a steward of capital to make sure all is being done to create efficient companies and capital markets — both prerequisites to delivering long-term retirement security to beneficiaries.
“Responsible investment isn’t about changing the world; it’s about understanding how the world is changing and how companies will be affected.”
Q: Why should organizations care about responsible investing?
J.A.: A fund manager can improve the resilience of a portfolio by identifying and managing financial risks from governance failures, policy and regulation, and environmental and social trends. A significant number of studies support the belief that the quality of a company’s governance practices positively correlates with market-based outperformance and a strong link between poor corporate governance and underperforming companies. A growing body of research suggests a positive correlation between firms with higher ESG ratings and better returns on equity, cash flow, and dividend growth. Further, studies have shown that if done effectively, shareholder activism can create shareholder value. Although these factors won’t matter in every case, or to the same degree, they can have an impact. But there’s more to RI than playing defense; there’s increasing opportunity for growth investing as ESG factors become even more of a catalyst for global growth.
The truth is that current consumption and production patterns are exceeding the ability of natural capital systems to provide resources to power the world’s needs. This is putting pressure on businesses. At the same time, there’s a lot more utilization of social media to focus on environmental stresses, and businesses are facing reputation risks for being out of line with current social expectations. Businesses and societies face a joint challenge to do “less with more,” and more than 90% of the world’s 250 largest global listed companies now issue sustainability reports. Some commentators say we are undergoing a resource and efficiency revolution; others call it the low-carbon industrial revolution. Major change is afoot, and there will inevitably be winners and losers. Our focus is on the investment implications of this.
The global investment industry’s collaborative response has been the UN-backed Principles for Responsible Investment, which represent the first set of globally consistent, widely supported principles for the investment community around integrating ESG factors. The principles have come a long way since Mercer and a small group of investors joined as founding signatories in 2006; today, they are supported by more than 1,200 investors globally, representing US$34 trillion in assets.
J.A.: Generally, our clients have a responsibility to secure the greatest financial returns while balancing risk; therefore, the first question is always about whether adding an ESG perspective supports this aim. Our view is that it can, in three ways: by better managing risk, identifying investment opportunities, and supporting engagement with investee companies.
J.A.: Integrating ESG considerations into your investment approach should be an evolution, not a revolution. It must be accomplished over time, with buy-in from all stakeholders. The first step with most investment committees is to hold an education and beliefs workshop. In these sessions, committees explore the economic and social trends that are making ESG factors more relevant to company and investment performance, and explore academic and practitioner evidence. It’s not about completely changing an investment approach; it’s about widening the lens to focus on protecting a portfolio against relevant risks and enhancing opportunities by opening access to growth. After the session, investors generally develop their own investment beliefs that reflect areas of joint consensus, ranging from the relationship between ESG and fiduciary duty, to the importance of corporate governance, and materiality of environmental and social issues to company performance.
"Integrating ESG considerations into your investment approach should be an evolution, not a revolution.”
Each investor’s approach will be unique and should reflect its priorities based on stakeholders, regulators, investment structure, and available resources. For example, a recent trend is for corporate plan sponsors to look at how they can align their pension investment strategy with their corporate approach to sustainability.
Once a common understanding has been established and reflected in investment beliefs, an investor’s processes and portfolio can then be aligned to reflect these beliefs. A first step is to review how well existing managers incorporate ESG factors and active ownership principles into their strategies. Mercer has more than 5,000 ESG ratings that reflect how well a range of traditional investment strategies incorporate ESG. Clients use these ratings to monitor existing managers and as an input to selecting new managers.
Another step is to consider the opportunity side of ESG, which means looking at sustainability-themed managers that look to exploit the transition toward a more efficient, low-carbon economy. We hold these strategies to the same in-depth, forward-looking research process as all our strategies.
J.A.: There are many internal and external drivers pushing investors to consider their approach to responsible investment. Though an organization shouldn’t make a revolutionary change to its investment approach, a failure to consider ESG factors could put it on the wrong side of this evolution in investing.
For more information or to identify your local responsible investment contact, visit www.mercer.com/ri.
 Deutsche Bank. Sustainable Investing — Establishing Long-Term Value and Performance, 2012.
Hermes. ESG investing: Does it just make you feel good, or is it actually good for your portfolio? 2014.
GMI Ratings. GMI Ratings Research Findings: For the 10-year Period Ended August 31, 2012, a Portfolio of Companies with Top-decile AGR Ratings Would Have Outperformed the Lowest-decile Portfolio by 54%, 2012.
 Bebchuk L, Brav A, and Jiang W. “The Long-term Effects of Hedge Fund Activism,” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2291577, accessed 29 April 2014.
 See www.unpri.org for information on the Principles for Responsible Investment.
|Jane Ambachtsheer (Toronto)
+1 416 868 2659
|Helga Birgden (Melbourne)
+61 3 9623 5524
|Aled Jones (London)
+44 20 7178 3594
|Craig Metrick (Denver)
+1 303 376 5972