Less than one in ten fund management strategies are able to boast top environmental, social and governance ratings, according to Mercer’s Global Investment Manager Database.

Having assessed over 5,000 strategies on a four-point scale (a rating of 1 or 2 meaning the funds are "highly rated"), Mercer found that only 9 per cent made the grade.

Of the 5,175 strategies assigned ESG ratings, 57 per cent were in listed equities and 20 per cent were in fixed income (real estate, private equity, hedge funds and others comprised the remainder). Of those strategies which scored highly on the ESG scale, private equity comprised the highest proportion, with hedge funds and fixed income faring worst. On a geographical basis, emerging markets and Asia-Pacific had the highest proportion of top ratings, while Canada had the fewest.

According to the consultancy, the overall low number of strategies gaining a top ESG rating was unsurprising, due to the rigour of its assessment approach.

“There is still much work to be done by the investment community to fully integrate responsible investment practices. We would expect the number of highly-rated strategies to increase over the next few years as more and more investment professionals come to recognise the sound investment and competitive reasons for active ownership,” said Andrew Kirton, global chief investment officer at Mercer.

“The way money is being managed is evolving – our role is to help clients achieve better investment outcomes, and we believe ESG analysis and active stewardship practices support this. In particular, active engagement with companies where performance is seen as wanting ought to have a complementing role in investment management, alongside the sale and purchase market disciplines.”

ESG analysis has come to the fore in recent years as a means through which to manage risk, as well as a way of addressing the ethical considerations of investors. There are numerous methodologies used in ESG screening, ranging from negative screening which filters out investments associated with arms or alcohol, for example, to positive screening methods which pick out firms which are run well on ESG lines. There has also been an associated increased emphasis on funds utilising their shareholder voting rights in order to influence companies' behaviour. 

Nearly six out of ten (58 per cent) of the strategies which Mercer gave a top rating to were “ESG” or “sustainability” branded or thematic vehicles, and 72 per cent are managed by signatories to the United Nations Principles for Responsible Investment. For those strategies given a “2” rating, 22 per cent were ESG or sustainability-branded, meaning that the remainder were “mainstream” vehicles (68 per cent were PRI signatories). The fact that even mainstream strategies were scored highly on the ESG scale would seem to indicate growing recognition that issues like corporate governance can help managers make well-informed investment decisions as much as to address ethical concerns.