When a large global consulting firm like Mercer is putting an ESG ranking on more than 5,000 investment strategies within its Global Investment Manager Database it's time to pay attention to what ESG is and why it's important.

Since 2008, Mercer has been assigning environmental, social and governance (ESG) ratings to investment strategies that span asset classes and geographic regions. The ratings look at the degree to which portfolio managers consider a company's ESG practices when evaluating whether to invest in its stock. Many more portfolio managers than ever before are looking at such practices as another way to measure the risk of investing in particular companies.

Jane Ambachtsheer, Mercer's global head of responsible investment, acknowledges that "the focus on ESG factors as a way of managing risk is still a relatively young concept." But this focus will keep growing as ESG measures continue to become more precise and sophisticated. Managers who pay attention to ESG criteria now will be the ones to understand how best to integrate them as their importance in investment evaluation grows.

Mercer would not release any names of the strategies or managers evaluated to me. But Mercer spokesman Bruce Lee said some of the strategies have mutual fund vehicles and the managers serve pension funds, high-net-worth, endowment, foundation and wealth management clients.

Sadly, of the 5,175 portfolio strategies assigned ESG ratings by Mercer this year, only nine percent achieved the highest ratings. "There is still much work to be done by the investment community to fully integrate responsible investment practices. We would expect the number of highly rated strategies to increase over the next few years as more and more investment professionals come to recognize the sound investment and competitive reasons for active ownership," said Andrew Kirton, Mercer's Global chief investment officer.

He noted the way money is being managed is evolving and Mercer believes ESG analysis and active stewardship practices help managers achieve better investment outcomes. "In particular, active engagement with companies where performance is seen as wanting ought to have a complementing role in investment management, alongside the sale and purchase market disciplines," he maintains.

About 57% of the 5,175 strategies were in listed equities, 20% were in fixed income and the remaining 23% were across real estate, private equity, hedge funds and other categories. Private equity had the highest proportion of highly rated ESG strategies, while hedge funds and fixed income had the fewest. From a geographic perspective, emerging markets and Asia-Pacific strategies had the highest proportion of top ratings, while Canada strategies had the least.

Mercer gave four ratings, with 1 and 2 being the highest. As one might expect, 58% of the ESG1 rated strategies are "ESG" or "Sustainability" branded or thematic strategies, and 72% are managed by signatories to the United Nations Principles for Responsible Investment (PRI). Of the ESG2 rated strategies, a smaller percentage of strategies - 22% - are ESG or sustainability-branded. This means the other 78% are "mainstream" strategies which incorporate ESG into their analysis to make well-informed buy/sell decisions, Mercer noted. PRI signatories manage 68% of the ESG2 rated strategies.