Frequently asked questions

What is the overall goal of the Principles for Responsible Investment (PRI) project?

The PRI aim to help investors integrate consideration of environmental, social and governance (ESG) issues into investment decision-making and ownership practices, and thereby improve long-term returns to beneficiaries.

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 performance of portfolios, particularly over the long term.

PRI signatories are also part of a network, with opportunities to pool resources and influence, lowering the costs and increasing the effectiveness of research and active ownership practices. The Initiative also supports investors in working together to address systemic problems that, if remedied, may then lead to more stable, accountable and profitable market conditions overall.

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 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.

What does this mean for the investment supply chain?

For institutional investors to make these 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 will be on hand to help investors implement them. Signatories will also have access to collaborative opportunities, guidance on addressing ESG issues and networks that would be otherwise unavailable. 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.

Who can sign?

There are three main categories of signatory. (Commitment is expected from the top-level leadership of the organisation across the whole investment business.)

Asset owner: Organizations that represent end-asset owners who hold long-term retirement savings, insurance and other assets. Examples include pension funds, government reserve funds, foundations, endowments, insurance and reinsurance companies and depository organizations. 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: Organizations 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 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 it manages more of its own funds than of third-party clients.

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 organization. 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 recognized that this may take some time, but on balance, the drafting signatories believe that a whole-of-organization 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 organization. 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.

Does signing involve a financial commitment?

There is currently no compulsory fee associated with signing the Principles. However, there is a suggested annual voluntary fee of $10,000 to help the work of the secretariat in supporting signatories and promoting the Principles.

From 2011 an annual mandatory fee will be introduced for all signatories. The fee will be scaled depending on fund size and type, and for large funds, will not exceed the current suggested annual voluntary contribution of US$10,000.

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.

What do signatories commit to?

The one mandatory requirement of being a signatory is the completion of the annual Reporting and Assessment process. This is an online survey that helps signatories evaluate progress in implementing the six Principles. This commitment applies to all asset owner and investment manager signatories. There is a grace year to allow 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/

The PRI Initiative also announced at its 2009 Annual General Meeting that it plans to introduce an annual mandatory public reporting requirement for signatories. Signatories will be required to disclose their progress in implementing the Principles. A consultation is currently underway to determine the most appropriate indicators for these elements in time for their 2012 introduction.

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 direction to head in 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. The minimum requirement to remain a signatory is participation in that survey and through that tool, demonstrating continual improvement. Participation in this annual survey 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 13-person board made up of 11 elected asset owner signatory representatives and two UN representatives from the UN Environment Programme and the UN Global Compact. The PRI Initiative is currently legally administered by the Foundation for the Global Compact.

What difference will the Principles make in the world?

While these Principles are designed to enhance the delivery of long-term returns to beneficiaries, their implementation will also focus greater attention on ESG issues throughout the investment and corporate sectors. New research and better metrics will be 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 extra-financial 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. In this way, the Principles for Responsible Investment will contribute to improved corporate performance on environmental, social and governance issues.

How can passive managers interpret Principle 1?

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 meant 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.

The PRI annual Reporting and Assessment survey reflects the aspirational nature of the Principles, in that if a signatory indicates that it is passively managed, the questions on active management and ESG integration into stock selection disappear from the survey and are not counted in the totals. There is therefore no risk that passive funds will score less highly on this survey simply because of their indexed holdings.

More information

• Principles for Responsible Investment
• Signatories to the Principles