The United Nation’s responsible investing body, Principles for Responsible Investment (PRI), could delist up to 50 groups next year, as reported by the FT.
Seemingly, almost a third of the PRI signatories placed on a watchlist by the PRI are at risk of being booted out of the body next year.
Last year the PRI put 180 of its signatories on notice after an annual audit suggested they had not demonstrated a minimum standard of responsible investment activity.
Signatories to the PRI, which include asset owners and managers, commit to six principles (See below) designed to embed environmental, social and governance (ESG) considerations into mainstream investing and holding companies they invest in to account on ESG failures.
Signatories must file an annual report to the PRI detailing their progress. And continuing to make progress is key. An organisation has to do more each year. You are either in or you are out!
According to the FT article, the PRI last year gave those on the list two years too lift their game. The responsible investment body said 88 on the watchlist made improvements and met the minimum requirements this year. It is also working with 42 signatories who are on track to do so by 2020.
However 50 groups with $1tn in assets have failed to engage with efforts to get them to shape up and are at risk of being delisted. The PRI refused to name names.
As the article highlights “The move comes at a time of greater scrutiny of whether investors are practising what they preach when it comes to responsible investment. “We still have some where they haven’t met with us,” said Fiona Reynolds, chief executive of the PRI, who said it was hard to know why they have not done so. “The aim was always to get people moving, not to delist people.” The PRI also requires that at least half a fund manager’s assets be covered by a responsible investing policy and for there to be explicit commitment to the issue by senior managers.”
Raising the Bar on free riders
This comes after the PRI signalled last year they were raising the bar by introducing new minimum hurdles. PRI is also pushing its 1900-plus members to be more active on issues like climate change, human rights and corruption. The SMH reported that collectively this group has US$70 trillion in assets under management.
As outlined by the SMH “The PRI put in place minimum requirements, a move it hopes will strip out free-riders in its ranks while bolstering its relevance, more than 10 years after the PRI’s launch by then-United Nations secretary general Kofi Annan and a group of major institutions……….. “And it wants its members to be more active in holding companies to account on so-called ESG – environmental, social and governance – issues, with climate change risks, fracking, corruption, water rights, modern slavery and child labour among its current areas of focus.”
As noted in the SMH article many PRI signatories proudly tout their membership, sustainability reports and marketing materials, but about 10 per cent would not currently meet the proposed new hurdles.
Responsible investing is more than establishing portfolio exclusions.
Being a PRI signatory takes a real commitment. Increasingly the PRI is asking signatories to be more active. This includes investors wield their proxy votes against company management when more gentle forms of engagement – like letters to boards and meetings – fail to get results.
Collaborating with the industry is also a key component of being a signatory, e.g. PRI members have collectively pushed for more disclosure on issues like water quality, air emissions, and community consultation and consent by fracking companies, and for improved labour practices in agricultural supply chains.
Also, late last year, the PRI backed the Climate Action 100+ campaign, launched by 200 institutional investors with US$26 trillion in assets under management, which aims to push 100 high-emitting companies including BHP, Rio Tinto and Wesfarmers to curb emissions and boost climate risk disclosure.
As outlined in a previous post, increasingly best practice involves incorporating ESG Integration, Exclusions, and Impact Investing into the investment process and implementing across a variety of asset classes i.e. not just equities.
Furthermore, while exclusions adopt a negative approach, increasingly the ESG research is being applied in a positive way i.e. investing in companies with the best ESG practices rather than just avoiding those with the worst practices.
PRI signatories are required to report once a year on their activities, pay their fees and declare their intention to invest responsibly via the six voluntary and aspirational principles.
They also have to:
- have a responsible investment policy that covers at least 50 per cent of their assets under management,
- name a person within the organisation that is responsible for carrying it out, and
- spell out who in their group’s senior ranks is accountable for it.
As the SMH records they are not particularly high hurdles.
It is not that onerous and it is amazing what can be achieved with steady incremental improvements.
How to avoid being on the PRI Black List?
A recent UBS Survey highlighted that a lack of internal resources was one of the most important barriers to ESG related thinking. Unclear terminology was another, along with a fear it will hurt financial performance (I hope to blog on this barrier later).
A lack of internal ESG implementation knowledge, particularly on Boards and Trustees can not only be a barrier to taking the first steps toward being a Responsible Investor, it is also a barrier for the advancement and continuous improvement of the Responsible Investing approach the PRI is looking for.
Terminology is a barrier but can be easily overcome.
Furthermore, from this perspective, the first step an organisation should take when adopting ESG and a Responsible Investing approach is to formulate a Policy. This signals a genuine intent to start integrating ESG. The Policy should be Board approved.
Therefore, very surprisingly, the USB Survey found that only a minority of ESG adopters (7%) had established a Policy. This is staggering. 40% of the survey respondents said no – but would like to do this! wow. 30% just said no.
The UBS ESG Survey, Do you or don’t you? Received 613 responses from asset owners, across 46 countries representing EUR19 Trillion in assets. Not all the respondents were PRI Signatories.
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Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.