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Mercer will begin reporting from next year on the practical impact of its responsible investment (RI) approach in addition to financial measures.

Speaking at the group’s conference in Wellington, New Zealand, last week, Alexis Cheang, the Sydney-based Mercer senior consultant for responsible investments, said the firm had developed a framework for measuring outcomes against sustainability goals.

Cheang said investors wanted to see evidence of the positive impact their RI allocations in addition to financial returns. “We plan to introduce impact reporting next year,” she said.

For example, Cheang said the 17 ‘Global goals for sustainable development’ provide a good guideline for RI funds to measure real world success.

Endorsed by 193 world leaders in September 2015, the 17 goals include targets such as no poverty, zero hunger and affordable clean energy.

“If these Goals are completed, it would mean an end to extreme poverty, inequality and climate change by 2030,” the website promoting the UN-brokered goals says.

Cheang said while the 17 goals form a high-level target for RI, at a more down-to-earth level the investment industry was tackling the process in four main ways:

• Exclusions;
• Integration of environmental, social and governance (ESG) factors into the investment process;
• Active ownership – such as voting proxy shares and engagement with companies; and,
• Sustainability-themed specialist investment vehicles.

She said all approaches had merit but investors should be clear about what RI means to them.

To date, Cheang said NZ institutions had focused mostly on exclusions, rushed in over the last year in response to the cluster-munitions-in-KiwiSaver crisis.

“Exclusions might be the first cab off the rank but the debate needs to move on to how to integrate ESG into investments and active engagement,” she said.

It can also be difficult sometimes to draw the line under what to exclude under a negative screening process, Cheang said.

“The details can get tricky,” she said. For example, investors may want to exclude any company with links to nuclear weapons, which – if the definition is broad – could include respected global firms like GE or Warren Buffett’s Berkshire Hathaway.

Australia was well ahead of NZ in the RI evolution, Cheang said, with a much higher proportion of investor signatories to the UN Principles for Responsible Investment (PRI). Those signed up to the PRI must consider ESG factors in their investment decisions.

Demand for more nuanced ESG products in NZ would inevitably grow, she said, citing a recent local mandate for Mercer’s global equity RI fund – its first in this country.

However, Mercer NZ clients were exposed to the firm’s RI integration process that ranks underlying fund managers on a 1-4 ESG scale.

Under the ESG scaling most 4-rated managers won’t be considered by Mercer, she said – although in the hedge fund space 4s were unavoidable.

The ESG ratings can also apply to passive managers, Cheang said, where factors such as proxy voting records come into play.

As more data and research arrives – Mercer currently uses MSCI for much of its ESG info – she said more sophisticated RI metrics could be added, such as portfolio carbon footprint sizes.

– David Chaplin, Investment News NZ