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Mercer Takes ESG to a New Level

Mercer Global Advisors revealed on Wednesday that it has become one of the first independent RIA signatories to the United Nations’ Principles for Responsible Investment.

Mercer Global Advisors Inc. revealed on Wednesday that it has become one of the first independent registered investment advisor signatories to the United Nations’ Principles for Responsible Investment, a sort of working group for incorporating environmental, social and corporate governance factors into investing.

The Denver-based RIA’s chief investment officer, Don Calcagni, told in an interview that the company has committed to corporate governance reporting requirements and incorporating ESG best practices both within the firm and by its asset management partners.

“The intent is to encourage global asset managers to be more responsible about who they invest in (such as) gender equity and nondiscrimination, by controlling how we allocate capital throughout the financial markets. We can influence companies to do a better job.”

The reporting is voluntary. Mercer’s first report to PRI will be in 18 months. It will include things like how much of the company’s assets are subject to ESG mandates and “what we are doing to incorporate ESG principles.” He added that it is not unlike the reporting requirements that Mercer has in place for the SEC and custodians.

The PRI operates according to six governing principles, the first of which is to "incorporate ESG issues into investment analysis and decision-making processes."

The move is both about adapting to the changing attitudes of clients and promoting the right company ethos, Calcagni said.

“The reality is this: we are going to see the biggest transfer of wealth in the next 10 years, and the recipients of that wealth are going to be millennials and women. They are very sensitive with regard to investments and we will apply bone crunching pressure to asset managers to clean up their act,” he said. “It’s a force for good; as shareholders it is their right to put pressure on the companies they own to clean up their act.”

Calcagni said that clients are clamoring for this type of thing, as well as asking for more ESG investing options. “In today’s age we have a lot of clients who come to us and say, ‘I don’t want to be investing in companies that have human trafficking in their supply chain. Think of Jeffrey Epstein, you will see human slavery, certain environmental practices that some companies have are totally egregious.”

“The future is about connecting the investor better with their investments, bringing them closer” to the investment process. “Historically there have been lots of intermediaries between the investor and what they own.” With ESG investing, he said, “mom and pop investors can apply more pressure on Wall Street” to invest in better companies from an ESG point of view.

The company started offering ESG options a few years ago, and now has a full suite of customizable ones. It offers 17 different filters for investing, enabling investors to screen out environmental offenders and to support low carbon score firms. “There is a lot of room for clients to navigate” between what they do and don’t want to invest in.

Calcagni added that there are also solid business fundamentals belying Mercer’s offering of ESG strategies to its clients.

“This isn’t philanthropy,” he said. “There is academic evidence that ESG strategies earn better returns. There’s lots of evidence that these companies produce better returns.”

He referenced a 2016 Morningstar meta-analysis of dozens of scholarly articles on the subject. "This is increasingly common knowledge,” he explained.

He emphasized that corporate governance is perhaps the most important factor in determining whether or not a company a client is investing in is living up to best practices and is “step one” in the fact-finding best practices process for Mercer.

“Look at the Wells Fargo scandal where they were opening accounts that they shouldn’t be opening: That’s a breaking down of corporate governance,” said Calcagni. Indeed, many firms don’t even have independent boards of directors or independent annual audits, he added.  

And investors deserve to know this, which is why the company will start by querying its investment managers to ensure that they are doing all they can to adhere to ESG best practices.

Calcagni said that the company chose PRI because the group is nonbinding and voluntary. “This is an information exchange, a dialogue; it’s not like a regulatory body that comes in like Moses from on high and says, ‘Here is what you have to do.’ These are aspirational principles where we share what to do. Regulatory bodies tend to be held hostage by politicians.” Some of the largest asset managers in the world, such as BlackRock and Dimensional Fund Advisors, are members of PRI, he said, and “we have an opportunity to learn from the best of them.”

Moreover, he said, Mercer isn’t pursuing best practices in ESG in a vacuum, either. Just days ago, he said, the Business Roundtable, which includes 200 of the largest companies in the U.S., went on record as saying its members would not pursue profits at any cost and would purposefully avoid doing damage to society.

Mercer, which has 43 branch offices around the country and over $16 billion in client assets, was recently put up for sale by its private equity owner Genstar Capital, according to a source familiar with the investment banking community. 

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