The investment consultancy Mercer is to start including its proprietary environmental, social and governance ratings in all its client reports related to manager searches and performance by the end of the year, a move which it says reflects increased client interest in ESG issues.

The notion of including ESG considerations in investment processes has been gaining traction for some years now. Taking ESG factors into account is no longer seen as something which limits the investment universe and compromises returns. Rather, investment professionals seem increasingly cognisant that good ESG performance often goes hand in hand with good financial performance when investing in companies. Mercer assigns ESG ratings across investment styles, asset classes and geographies as part of its manager research process.

“ESG factors have the potential to become more important risk-return drivers for our clients,” said Andrew Kirton, Mercer’s global chief investment officer. “A growing number of institutional investors are expressing an interest in ESG assessments; however, relatively few managers integrate these factors into their investment processes. Incorporating ESG as a key aspect of the search process will promote constructive dialogue with managers on ESG related issues and result in better overall outcomes.”

Mercer has in fact been quite scathing of the investment industry’s ESG track record. In February the consultancy came out to say that less than one in ten fund management strategies are able to boast top ESG 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.

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.