For watchers of the responsible investment world, the recent ousting of five signatories from the United Nation’s Principles of Responsible Investment (PRI) last month is an indication of the initiative’s growing muscle.
Increasingly, investment professionals have come to accept that environmental, social and corporate governance (ESG) issues are part of their fiduciary duty and can affect the performance of investment portfolios. The UN’s PRI aim is to provide the framework for doing so.
In 2005 the United Nations Finance Initiative invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment (PRI).
Individuals representing 20 institutional investors from 12 countries agreed to participate in the Investor Group. Today, the number of signatories has grown to 573 – and includes funds and asset managers from Merseyside to Malaysia, Belgium to Brazil, large and small. There is a bias towards European and US participants, but emerging markets are beginning to make their mark too.
The PRI states that its principles are ‘voluntary and aspirational’ and provide ‘a menu of possible actions for incorporating ESG issues into mainstream investment decision-making and ownership practices’. It demands commitment to the six principles, ranging from integration through to engagement, implementation and reporting, and demonstration of progress on each. It was failure to deliver on the one mandatory duty – reporting their annual progress – that led to the de-listing of the five signatories.
In the wake of virtual financial collapse, and faced with an overwhelming trust deficit, financial institutions’ involvement in initiatives such as the PRI can only be a good thing. Designed not only to deliver better long-term financial returns, it also seeks to ensure a closer alignment between the objectives of institutional investors and those of society at large.
The SRI ‘movement’ as a whole has suffered from the absence of rigour in the evidence, process and metrics needed to overcome a industry skeptical about the role ESG issues have in defining corporate profitability. The recent report on its progress this year suggests that the PRI is gaining both ground and credibility. Challenges remain – not least a lack of good quality underlying data from companies, and concerns about commercial confidentiality. But with an investment clout now representing a total of over $18 trillion of assets under management it’s clear that the PRI is the biggest show in town.