James Gifford, Executive Director of the PRI Initiative, explains the importance of PRI and the impact it has on the institutional investment sector as well as the direction it will take over the next few years.
Five years on from the launch of PRI, are the Principles still important?
Absolutely. We can see more clearly than ever before that effective risk management and corporate responsibility are not only vital in terms of individual investments, they are also critical to the stability and health of the financial system as a whole. The financial crisis highlighted starkly the global interconnectedness of the investment system and the need for improved corporate governance and risk management throughout the financial sector.
Individual investors can deliver better long-term investment returns that consider emerging risks and opportunities arising from ESG factors. Failure to do so increases the kinds of negative consequences we have seen recently, undermining the value of the investments made by the financial system on behalf of millions of pension fund members and other individuals globally.
The BP disaster in the Gulf of Mexico wiped billions of dollars from the value of pension funds and other investments. Clearly it would have been beneficial for investors to have a better understanding of how BP was managing environmental and social risks before disaster struck.
The value of shares in News Corporation tumbled as news of the phone hacking scandal in the UK emerged – demonstrating the need for strong corporate governance that ensures high standards of business conduct.
While these are obvious examples of ESG issues that are clearly material, there are also many trends and risks that do not make the news but are driving investment returns into the future. The PRI is here to encourage these approaches, and this role is as relevant as ever.
How has PRI contributed to advancing the way investors deal with these challenges?
I believe we have made a substantial contribution towards moving responsible investment from the margins to the mainstream. Ninety-four per cent of IMs and AOs now have a formal responsible investment policy in place, up from 67% and 83%, respectively in 2007. There is a significant increase in the practical measures being taken to integrate ESG into internal investment processes, including in RFPs being issued by asset owners.
The investment industry has also become far more transparent about the way it deals with ESG issues. Nearly 90 per cent of PRI signatories disclose, to some extent, their approach or policy on ESG integration. In 2007, 67% of AOs and 88% of IMs disclosed RI/ESG issues in their investment process. Similarly, there have been clear increases in the amount of shareholder and policy maker engagement being reported by signatories.
We now have more than 300 signatories collaborating on shareholder dialogue with companies through the PRI Clearinghouse. Many of these were not undertaking any significant active ownership activities in the past. At a time when governments in many countries are urging investors to demonstrate that they are responsible owners and stewards of companies in the wake of the financial crisis, PRI and its signatories are playing a central role.
While we can’t take responsibility for all the progress in the industry, we are confident that that we have stimulated many more institutions to engage in responsible investment activities (and enhance existing activities) than would otherwise be the case. We recognise there is still a long way to go, but there is no doubt that the PRI has been one of the main drivers of the strong growth in responsible investment globally.
What would you say are PRI’s greatest strengths in its drive to make responsible investment mainstream?
First, our signatories. Our signatory base of over 900 organisations is a huge asset. We have signatories on every continent – and numbers continue to grow rapidly. The PRI Advisory Council has members from all over the world and a diversity of organisation types. This gives PRI a unique ability to identify global priorities and tailor responses to them according to local circumstances. It is our signatories’ commitment to incorporating ESG issues into their investment decision-making and their desire to be innovative in a rapidly changing world that direct our work.
There is huge demand for ideas and practical tools that can help manage risk and enhance returns while at the same time better aligning investors with society’s environmental and social aspirations.
Second, PRI is a practical organisation. Our signatories value our ability to provide them with targeted services and support as they strive to implement the Principles.
Third, we focus on issues that have implications for the whole of the financial system. Climate change, for example, will transform economies throughout the world, creating new risks and opportunities for investors. From engagement with signatories and experts, we can see a greater appetite for investors to understand the implications of climate change across their whole portfolio. The physical impacts of a changing climate, government-imposed caps on greenhouse gas emissions, changing demand for goods and services, and the urgent need for billions of dollars of investment to transform the world’s energy supplies and transport system will affect everything from how investors value individual companies to the way they need to think about the allocation of capital to different asset classes and different regions of the world.
Similarly, the Guiding Principles on Business and Human Rights developed by Professor John Ruggie of Harvard University and recently adopted by the UN Human Rights Council clearly demonstrate that human rights are now a core concern for business. For example, in the supply chains of multinational companies; in oil, gas and mining operations in areas where the rule of law is weak and local communities are vulnerable; and as the expansion of media and internet companies raises concerns about the protection of personal data and the right to privacy. This in turn is generating more interest in understanding the implications of human rights for investors.
Last, and perhaps most importantly, the PRI Initiative is a unique partnership between investors and the UN, through UNEP Finance Initiative and the UN Global Compact. It opens up the opportunity for our signatories to work with government, corporate and civil society sectors on a broad range of ESG and systemic issues. It brings together the legitimacy and convening power of the UN with the custodians of the world’s assets to work on how investors can deliver robust returns in a world that is ever more interconnected with the policy, development and global governance issues that are the primary focus of the United Nations.
Why has PRI decided to introduce fees now, after five years of voluntary contributions?
Mainstreaming responsible investment globally is a huge task and requires a degree of scale. We have reached the stage where we have to move to the next level of growth, in terms of outreach and support for implementation across asset classes, investor types and regions. We have to put in place the resources and the capacity we need to manage such growth efficiently and effectively. The decision to introduce mandatory fees has been validated by the fact that over 90 per cent of our signatories have paid their annual fee. It shows they value the network and the high level of service that we deliver and that they have confidence in the future direction of the Initiative.
You are also investing significantly in the Reporting and Assessment framework. Why is that?
Investors recognise the importance of reporting: it helps them to organise their activities and to be accountable to clients, beneficiaries and regulators. Since 2007 our Reporting and Assessment survey has provided a framework for investors to disclose their responsible investment performance. In 2011, 241 investors published their responses online. From 2013, the PRI Inititative will introduce a new industry-leading reporting framework that is designed by investors, for investors, and will help all signatories to provide a clear account of their responsible investment activities to clients, beneficiaries and wider stakeholders.
How do you see the PRI Initiative’s role over the next five years?
Our strategy and work programmes for the next five years recognise that we have a diverse signatory base, some with more experience in implementing the Principles and some just beginning their journey. We are also aware that responsible investment is in its infancy in many markets and investment sectors; and that there is much more to be done to embed a real understanding of ESG from top to bottom within investment institutions, and in the public policy arena.
Against this background, we have to perform multiple roles. We have to support signatories to integrate ESG into the whole investment chain – in-house investment by asset owners; the relationship between asset owners, investment managers and consultants; asset managers’ processes and decisions; and the interface between investors and the companies and assets they own. We plan to strengthen our Academic and Public Policy Networks, to reinforce the evidence base for responsible investment and encourage more public policy support for our signatories’ objectives. We want to expand our ability to deliver support to signatories in their own countries and their own languages. And we want to extend the reach of responsible investment by recruiting more signatories, particularly those that are influential in their own markets or sectors. We need to keep pace with the development of capital markets by strengthening our network in regions such as Asia, the Middle East and Latin America, and ensuring that we work with the full range of investors across all asset classes.
I look forward to PRI’s next five years being as successful and rewarding as our first five years.
Download the full report
Annual Report 2011