What are the origins of the Principles for Responsible Investment (PRI)?
The Principles were developed in a UN-convened process by a group of large institutional asset owners in 2005 and launched by Secretary-General Kofi Annan at the New York Stock Exchange in April 2006. They were designed to be applied by all investors, with a special focus on fiduciary institutions with long-term perspectives.
If you want to know more, please visit the PRI history page.
What is the goal of initiative?
The PRI Initiative aims to help investors integrate the consideration of environmental, social and governance (ESG) issues into investment decision-making and ownership practices across all asset classes and regions, and in so doing, help contribute to the creation of a sustainable financial system.
How will implementing the Principles influence investment returns?
Implementing the Principles will lead to a more complete understanding of a range of material issues, and this should ultimately result in increased returns and lower risk. There is increasing evidence that ESG issues can be material to the performance of portfolios, particularly over the long term.
PRI signatories are also part of a global network, with opportunities to pool their resources and influence to engage with companies on ESG issues, lowering costs for signatories to undertake stewardship activities. The Initiative also supports investors to work together to address systemic problems that, if remedied, may lead to less volatile, accountable and sustainable financial markets that reward long-term responsible investment
What are the implications for fiduciary duty?
The Principles are based on the premise that ESG issues can affect investment performance and that the appropriate consideration of these issues is part of delivering superior risk-adjusted returns and is therefore firmly within the bounds of investors’ fiduciary duties. The Principles clearly state they are to be applied only in ways that are consistent with those duties.
How do the Principles relate to Socially Responsible Investment (SRI)?
The Principles are designed to be compatible with the investment styles of large, and often diversified, institutional investors that operate within a traditional fiduciary framework. The Principles apply across the whole investment business of a signatory and are not designed to be relevant only to SRI products. However, the Principles do point to a number of approaches – such as active ownership and the integration of ESG issues into investment analysis – that SRI and many corporate governance fund managers also practise.
Do the Principles call for exclusion or screening out of particular companies or sectors?
No. The Principles suggest a policy of engagement with companies rather than screening or avoiding stocks based on ESG criteria (although this may be an appropriate approach for some investors). The Principles are generally designed for large investors that are highly diversified and have large stakes in companies, often making divestment or avoidance impractical.
Can passive managers sign?
The Principles were drafted by large, mostly public, pension schemes, many of which apply passive management to a large proportion of their funds. Principle 1 of the PRI, relating to the incorporation of ESG issues into investment decision making was not intended to apply to passively managed funds in their stock selection processes. During the drafting process, it was made clear that passive management is consistent with the Principles, and that passive managers’ responsibilities are largely exercised through active ownership activities.
What does this mean for the investment supply chain?
For institutional investors to make the Principles work, they will need to encourage a change in the way that their agents incorporate ESG issues into their processes. Principles 1 and 4 have some suggestions on how this may be done. It is also likely that the supply chain – fund managers, analysts and consultants – will respond to the Principles by offering products and services to help in implementation.
How will the PRI help investors in their day-to-day work?
The PRI provides investors with a high-level framework for integrating ESG issues into investment decisions. And as signatories develop policies and procedures for integration, the PRI Secretariat is on hand to help investors implement them. Signatories will also have access to collaborative opportunities, guidance on addressing ESG issues and a unique global network of peers. There are work streams and guidance materials for most asset classes and investment approaches. The PRI will also stimulate better research on the impacts of these issues on investments, which will lead to a broader range of products and services for investors.
See the PRI website for a full range of support activities that are in place for signatories.
There are three main categories of signatory.
Note: Commitment is expected from the top-level leadership of the organisation across the whole investment business.
Asset owner: Organisations that represent end-asset owners who hold long-term retirement savings, insurance and other assets. Examples include pension funds, sovereign wealth funds, foundations, endowments, insurance and reinsurance companies and other financial institutions that manage deposits. This is the principal category of signatory.
Investment manager: Investment management companies that serve an institutional and/or retail market and manage assets as a third-party provider.
Professional service partner: Organisations that offer products or services to asset owners and/or investment managers. Although such professional service partners are not stewards or managers of assets in their own right, they do have considerable influence over how their clients address ESG issues. For this group, becoming a signatory is an acknowledgement of the relevance of ESG issues to investment management. It also represents a commitment to providing and promoting services that support the implementation of the Principles by clients, and to improving such services over time.
Signatories self-select the category they fall into, but the PRI Board reserves the right to determine which category is most appropriate. While the categories are not designed to be overly prescriptive, the general rule is that an investor would be considered an asset owner (rather than an investment manager) if the sum of the on-balance sheet investment assets of the organisation exceed the assets that it manages for external clients through any majority-owned investment manager subsidiaries.
To decide on the signatory category, the PRI Board will review the type of asset in the life and pension divisions of a typical asset owner (excluding staff pension fund), as well those in the organisation’s private banking/wealth management subsidiaries. Investment management assets are reviewed in sum as well as by separate internal and external mandates. Comparison of the asset owner and investment manager assets under external management will determine the signatory category.
A separate category, PRI Network Supporter, includes non-profit, peer organisations that would like to publicly express support for, and promote, the PRI within their constituencies.
Can we sign up on behalf of our SRI fund or ESG practice only?
No. The objective is for the Principles to be integrated within the mainstream investment and ownership practices across the investment functions of an entire organisation. They are not just applicable within specific asset classes or product lines (this applies for all categories of signatory). The Principles have been designed as a commitment from the top-level leadership of the whole investment business. It is recognised that this may take some time, but on balance, the drafting signatories believe that a whole-of-organisation commitment is important to the mainstreaming process.
If we fit into multiple categories, can these business units sign up independently?
We ask that the highest level of the company, including on behalf of its subsidiaries, sign up on behalf of the entire organisation. The signatory category would depend on which of these businesses is the largest. However, in cases where different businesses are run independently, it is possible to sign up across different categories of businesses as an asset owner, investment manager or professional service partner.
What resources will be required to implement the Principles?
Investors will choose to implement the Principles in different ways, and those choices will affect resource requirements. At a minimum, institutions should allocate sufficient staff time to properly understand the types of activities that are suggested in the Principles, investigate how other investors have used them and begin the implementation process.
Does signing involve a financial commitment?
There is a mandatory fee which is scaled based on assets for investors and employees for service partners. The current fee level can be found here.
What specifically do signatories commit to?
Asset owner and investment manager signatories commit to completing the annual Reporting Framework . This process is mandatory and helps signatories and the PRI to evaluate progress in implementing the six Principles. There is a grace period of one year for new signatories to learn from their peers and determine how best to monitor and report their progress. You can read more about this at www.unpri.org/reporting/
What happens if we sign but find it difficult to comply?
There are no legal or regulatory sanctions associated with the Principles. They are designed to be voluntary and aspirational. There may be reputational risks associated with signing up and then failing to take any action at all, but the commitments are, for most signatories, a work in progress and a directional focus, rather than a prescriptive checklist with which to comply. The initial focus is on innovation, collaboration and learning by doing. The annual PRI Reporting and Assessment survey will help you evaluate your progress. Participation in the reporting framework is the minimum requirement to remain a signatory and failure to do so can result in being publicly delisted from the Initiative.
Who governs the Principles for Responsible Investment project?
The PRI is governed by a 16-person Advisory Council (PRIAC) made up of 9 elected asset owner signatory representatives 4 non-asset owner signatory representatives, two UN representatives from the UN Environment Programme and the UN Global Compact and the appointed Chair. Asset owner members of this group then appoint a smaller board of directors which serves as the fiduciary governing board the organisation, overseeing the work of the Secretariat.
What difference will the Principles make in the world?
While these Principles are designed to enhance the delivery of long-term returns to clients and beneficiaries, their implementation will also focus greater attention on ESG issues throughout the investment and corporate sectors. New research and better metrics are being developed to support investors as they become increasingly active owners. Encouraged to adopt a more systematic approach to managing ESG issues, corporate management will take more interest in these additional drivers of risk and reward, which will come to define corporate profitability in the medium and longer term. The PRI will also stimulate increased active ownership on ESG issues by investors via the PRI Clearinghouse. In this way, the Principles for Responsible Investment will contribute to improved corporate performance on environmental, social and governance issues.