4 July 2005 Global Research of Investment Managers with Increasing Focus on SRI 13th Australian Colloquium of Superannuation Researchers Bruce Gregor Principal Mercer Investment Consulting

Introduction Agenda What is SRI? SRI: Mercer view Mercer manager research process New SRI research of “mainstream” managers SRI trends: What do investment managers think? Conclusion Lack of quality SRI/governance research available Last year Mercer formalized an SRI business unit in order to deepen our knowledge base, and take leadership in the SRI consulting space

Socially Responsible Investment Ethical Investment What is SRI? Socially Responsible Investment Ethical Investment Environmental, Social and corporate Governance Issues SRI . . .process, research, investment funds ESG . . . analysis, issues, screening factors

Mercer Views on SRI We have clients who require SRI investment mandates and their number is growing globally A growing body of literature argues that corporate social performance can impact stock price SRI funds can produce risk/return characteristics comparable to those of traditional portfolios, and Social and/or Environment focus can be a proxy for good management SRI has evolved significantly, but still faces barriers. For example: jeopardizing absolute financial returns pushing a social (rather than financial) agenda Mainstream investors not engaged in SRI agenda

Socially responsible investing – A trend Environmental issues will become one of the big issues for society Societies needs a mechanism for controlling the corporate sector in a global economy Superannuation and private funds are important elements in the financial infrastructure of most societies – society will expect them to be supportive SRI is inherently a risk-mitigating process, consistent with a fiduciary’s duty

Mercer Manager Research Framework Aim: Identify managers with the highest probability of outperforming the relevant benchmark, with strong risk control and transaction cost management Close monitoring required – comparative advantages are difficult to sustain over time Primary focus: regular qualitative assessment of capability relative to a range of central investment process factors Factors: (1) Idea Generation; (2)Portfolio Construction; (3) Implementation & (4) Business Management Ratings: A, A-, B+, B, B-, C Consistent global application

Extending research to incorporate SRI factors We are now evaluating mainstream manager behaviour with respect to voting, engagement, and integration of SRI analysis This research stems from beliefs such as: ensuring that votes are actively cast fulfils the obligations of active ownership engaging with companies to promote sound corporate social responsibility business practices reflects a commitment to active ownership, and could lead to enhanced returns (or risk reduction) over the long term SRI criteria can have material financial impact on a company’s performance. Managers with access to good information on SRI criteria can therefore use this information to their advantage

Mercer’s SRI manager research How it will be used The new research will be used with clients in reviewing incumbent managers, and as a consideration in new manager searches Applicable to investors not keen on being labelled “SRI” investors but still wanting to invest responsibly Will increase the universe of managers for SRI investors comfortable with certain managers’ practices Research will also be made available to other appropriate groups Initially UK & global managers, then Australian managers

Initial SRI Research findings Voting In terms of voting activity, we look at a number of factors, relating to a manager’s policy, how and where votes are cast, resources, client-specific issues, etc. FINDINGS As expected, a range of activities have been seen. There are some striking differences in consistency of cross-regional voting practices. Reporting is relatively scarce across the board.

Initial SRI Research findings …(cont.) Engagement When researching engagement activity, we look at things such as a manager’s policy, the focus of engagement activities, resources, “success” metrics and collaboration FINDINGS Engagement activity is typically undertaken by some combination of specialist SRI teams, central corporate governance groups, and mainstream analysts/portfolio managers. Associated memberships and collaborative activity varies greatly.

Initial SRI Research findings …(cont Initial SRI Research findings …(cont.) Integration into Investment Decisions When assessing the integration of SRI analysis, we consider access to SRI analysis by mainstream analysts and fund managers, the role of this research in buy/sell decisions, resources, etc. FINDINGS Where SRI teams exist, they are increasingly integrating with the mainstream (i.e. SRI research outputs become mainstream inputs). While the growth of SRI research providers may signal wider interest among the mainstream, it appears widespread integration is still some ways away.

SRI: What do investment managers think? Our recent Fearless Forecast surveyed 220+ investment managers worldwide, and asked them to predict in which time frame active ownership, screening, and the integration of SRI analysis “will become a common component of mainstream investing?” Findings 77% of managers predict that active ownership will become a mainstream investment practice within 5 years (89% in 10 years) 39% predict that positive or negative screening will be mainstream with 5 years (65% in 10 years) 37% predict that the incorporation of SRI factors will become mainstream within 5 years (73% in 10 years) Overall, pan-Europeans are the most bullish, US managers the least Source: 2005 Fearless Forecast. ©2005 Mercer Investment Consulting, Inc. and Mercer Human Resource Consulting Limited. See www.mercerIC.com for full survey findings.

Most investment managers see SRI as a trend Active ownership (shareholder engagement/activism, proxy voting) Positive or negative screening for social or environmental factors The integration of social/environmental corporate performance indicators Over next 1-2 years Over next 3-5 years Over next 6-10 years Never Source: 2005 Fearless Forecast. ©2005 Mercer Investment Consulting, Inc. and Mercer Human Resource Consulting Limited. See www.mercerIC.com for full survey findings.

Conclusions The past five years have seen growing support for SRI on the part of governments, investors and specialist research/service providers Our new focus on SRI research will assist a broad range of investors with their SRI needs Our Fearless Forecast suggests that investment managers also predict the integrating of SRI into mainstream practices Mercer believes SRI influences are here to stay