Mercer’s Responsible Investment Newsletter (June 15, 2010) outlines preliminary results of integrating ESG analysis into global equity portfolios.
Our analysis of the beta of ESG integration has so far been quite positive – ESG factors are material and integrating these factors into investment decision-making can reduce investment risk without sacrificing return…
Initial analysis on adding alpha to a global equity portfolio through a tilt towards sustainable themes, indicates the following:
- A portfolio with a tilt towards sustainable themes has a higher risk/reward ratio versus a broad market index, but has mixed results when versus a comparable themed index.
- In the sustainable themed space, the risk of bubbles and strategies’ short track records make manager selection key.
- The themes of renewable energy and water so far show strong return potential versus the broader market.
The Newsletter also addressed the fatalism of many investors, including large funds, who doubt their proxy vote can make a difference, providing several examples to refute that assertion. Even if you are not ready to take the plunge into “active” ownership, Mercer argues an interim step, “informed” ownership. “This could be defined simply as being satisfied, through due diligence, that votes are being cast in the best long-term interests of the end client or owner.”
Of course, Mercer offers due diligence on investment managers, including evaluation of resources and processes dedicated to proxy voting and ESG issues. They also cite membership organizations, such as the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility and the UN’s Principles for Responsible Investment.
Around the world, institutional investors work hard to achieve the best long-term returns for their clients, participants or beneficiaries. We believe that voting and constructive engagement with companies and peer organizations can help mitigate company specific risks for which investors may not be compensated. There is also reason to believe that more shareholder participation over time can raise the bar for corporate governance in the broader market and improve beta. If your organization agrees with these arguments, then voting and engagement may be a low cost way to help achieve these results.