A short-term outlook and portfolio turnover exceeding 100% per annum is inhibiting ESG integration finds new  research by Mercer,  the investment consulting firm. These findings are included in it’s recent report, Gaining Ground: Integrating Environmental, Social and Governance (ESG) Facors into Investment Process in Emerging Markets.

The report, commissioned by IFC, a member of the World Bank Group suggests that sustainable investment assets under management in emerging markets have grown to over U$300 billion, or nearly 10% of total investment in emerging markets in 2008. The results are based on a survey of 514 equity managers around the world, of which 177 invested in emerging markets. More managers with investments in emerging markets (46%) are likely to integrate ESG factors compared with only 34% of the all managers group..

Commenting on the report, Danyelle Guyatt, head of research at Mercer’s Responsible Investment Unit said: “The research found pockets of innovation, with many local fund managers having deeper knowledge and understanding of social issues than their global counterparts. However there is also potential for improvement in practices, particularly in the utilisation of active ownership tools such as voting and engagement.”

Although corporate governance was found to be a relatively well-understood concept when compared with environmental and social issues, the authors found that investment managers struggle to obtain clarity on companies’ governance structures. “Active ownership has yet to become a first resort for fund mangers in emerging markets”, said Guyatt, “and we found few examples where managers felt ESG enhances value. Instead, managers focused more on ESG as a toll in risk management.”

The report recommends a number of steps that asset managers could take to improve their ESG approach: develop and consistetly promote a SI policy, clarify their expectations and consider joining collaborative networks such as UNPRI so as to learn more about ESG best practice principles.

Last Updated: 6 April 2009