TAKING MATERIALITY TO A NEW LEVEL
From its launch by then UN Secretary-General Kofi Annan in 2006 at the New York Stock Exchange, the PRI has grown to become the world’s largest network of responsible investors with 1325 signatories representing US$45 trillion of assets
The PRI supports asset owners and managers in incorporating ESG issues into their investment analysis and decision- making practices based on recognition that ESG issues can be material to investment returns. The ultimate goal is to create a sustainable global financial system and support the Global Compact’s vision of an inclusive and sustainable global economy.
HOW DOES IT WORK?
The PRI constitutes, in essence, a set of six aspirational principles that signatories incorporate in their investment practices. It is a collaborative platform through which asset owners, asset managers and financial service providers work together to implement the principles, foster good governance, integrity and accountability, and remove structural and regulatory obstacles to a sustainable financial system.
SUSTAINABLE INVESTING GOING MAINSTREAM
Responsible investment (RI) was in many respects in its infancy 15 years ago. As shown on the next page, the significant progress made since 2000 can broadly be seen in two main areas:
- The number of investors engaged in responsible investment and volume of assets under management have both grown considerably.
- The practice of responsible investing has evolved considerably in both approach and sophistication.
Another sign that sustainable investing is becoming mainstream is the involvement of large institutional investors. Many of these are now signatories to the PRI, and view responsible investment as a notable part of their business. On the other
hand, the small percentage of funds managed according to responsible investment criteria shows there is a long way to go before responsible investment is comparable with traditional investment approaches.
The direct contribution of the PRI Initiative to change in responsible investment practices depends on the particular market and size of the asset owner or investment manager. Research suggests that the PRI has been more influential in shaping the practices of signatories at the start of their responsible investment journey than in shaping those of larger investors with sophisticated RI programs already in place before joining.
Beyond its influence on individual signatories, the PRI also makes important contributions through clarifying what sustainable investment means in different asset classes; clarifying what active ownership practices responsible investors can exercise; supporting collaborative initiatives through its Clearinghouse; and promoting transparency on responsible investment practices through its Reporting Framework.
In recent times, the external operating environment has become more conducive to responsible investment. Regulations have increasingly guided asset owners to consider ESG issues in their investment decisions. There are many actors in this
space working in parallel with the PRI. However, the PRI has played an indirect role in the development of some regulations related to responsible investment such as the Code for Responsible Investment in South Africa (CRISA). Moreover, the
initiation of the Sustainable Stock Exchanges (SSE) initiative together with the Global Compact, UNCTAD and UNEP FI is a considerable contribution to the environment in which the finance industry and companies operate.
IS CAPITAL SHIFTING IN THE RIGHT DIRECTION?
Although RI is now an accepted part of the investment landscape, the question of short-term versus long-term investment is still a considerable issue. The majority of investors are still looking at companies’ quarterly performance, and in response
companies are still operating with this timescale in mind.
The PRI itself has played a significant role in directing investor and company attention towards longer-term value creation. Globally there has been a shift in the conversation on responsible investment from the fringe to the relative mainstream. The PRI has advanced thinking and dialogue in this area, in particular on fiduciary duty and the consideration of ESG issues in investment analysis and decision-making. Overall, the PRI can be seen to have facilitated and globalised the conversation on responsible investment and put it on the agenda of many financial institutions.
Despite this progress, it is worth asking if the allocation of capital is shifting in the right direction, onto a more sustainable footing. Here, it is clear that the transformation of the investment industry has a long way to go. The majority of the investment universe is not switched on to responsible investment yet and the short-term perspective remains an ingrained way of thinking. The PRI and the Global Compact, along with the SSE initiative, are likely to have a valuable role to play in this process through their ability to provide a platform for engagement and capacity-building among companies, investors, policymakers and other key stakeholders.
“We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term,
responsible investment and benefit the environment and society as a whole.”
– USING INVESTOR POWER TO DRIVE THE GLOBAL COMPACT
One of the core ideas behind the PRI is to mobilise investors to advance UN values, such as those represented by the Global Compact. It aims to do this by encouraging the incorporation of ESG issues into investment analysis and thus making corporate sustainability performance a part of decisions whether or not to invest. The PRI also aims to do this through shareholder engagement as a means to improve corporate
performance on ESG issues.
Examples of this approach that can be found through the PRI Clearinghouse, with activities including the coordination of:
Numerous collaborative engagements on topics relating to the Global Compact principles, such as human rights in the extractive sector, labour standards in the agricultural supply chain, water risks and anti-corruption
- The annual ’Communication on Progress: Leaders and Laggards’ campaign. This ran for over five years and asked non-reporting Global Compact companies to submit their Communication on Progress to regain active status or welcomed advanced-level reporting
- Direct collaboration between PRI signatories and Global Compact participants on topics such as responsible business in conflict-affected and high-risk areas. This project created a common language and understanding of a specific issue between investors and companies
the longer term; interests and incentives are misaligned; capital is allocated to businesses that may prove unsustainable. There has been a general loss of trust in financial institutions.