1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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.

10. 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.

11. 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.

12. 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: Fearless Forecast. ©2005 Mercer Investment Consulting, Inc. and Mercer Human Resource Consulting Limited. See for full survey findings.

13. 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: Fearless Forecast. ©2005 Mercer Investment Consulting, Inc. and Mercer Human Resource Consulting Limited. See for full survey findings.

14. 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