In this interview, James Gifford, Executive Director, reviews the key achievements of the PRI Initiative over the last 12 months and outlines its new strategic focus for the coming years.
What were the key developments within the PRI’s main work streams over the last year?
As additional resources have become available, the PRI has significantly scaled up both the quality and quantity of its offering to signatories in almost every work stream, and we are continuing to look for new ways to support signatories in their implementation of the Principles. The Clearinghouse, Implementation Support and Reporting and Assessment teams have all built significantly more capacity over the past year.
The Clearinghouse continues to be one of the most important areas of work, with collaborative engagements becoming more focused, better researched and thoroughly evaluated. A new Steering Committee has been set up to help prioritise where the Clearinghouse team should focus its efforts. And we are now, for the first time, allocating research budgets to support collaborative engagements.
We have seen some really interesting outputs from Clearinghouse activities, including the publishing of guidance on the link between executive remuneration and ESG issues, responsible business in highrisk and conflict-affected areas, and senior gender diversity on boards.
With additional staff in the Implementation Support team we can now help signatories implement the Principles across almost all asset classes. For example, we are now producing best practice guidance and case studies in areas of responsible investment that previously had little activity and low levels of understanding. We have also published new guidance to help signatories write and review responsible investment policies and communicate the business case for responsible investment, and we are currently seeking feedback on a new tool to help asset owners incorporate ESG issues in their investment manager selection and monitoring processes.
The other area where there has been huge progress in the last year is in our Reporting and Assessment work. Facilitated by the PRI Secretariat, a diverse group of signatories and region and asset class-specific technical working groups re-wrote the Reporting Framework from the ground up, consulting widely with other signatories along the way. A pilot in mid-2012 will be followed by the new framework going live for all signatories in 2013. It is an exciting development because it takes significant steps to reduce the reporting effort for signatories while greatly increasing the level of transparency and accountability.
While some signatories have expressed concerns about this change, we believe, overall, signatories recognise its importance and the credibility and legitimacy that a robust accountability process brings to the PRI and its signatories.
What are the new areas of strategic focus for the PRI going forward?
The global financial crisis demonstrated the ability of macro-level ESG and systemic issues to undermine investors’ interests. Implementing responsible investment on an organisational level will be insufficient if these macro problems are not addressed. So the PRI Advisory Council recognised that it is essential for us to tackle broader issues relating to the structure, function and governance of markets as a whole, including how they may interact with emerging macro ESG issues, if we are to fulfil our vision of mainstreaming responsible investment.
Our enhanced mission is based around the belief that a sustainable global financial system is a necessity for long-term value creation, rewards long-term responsible investment and has positive impacts for the environment and society as a whole.
Over the next four years, we will be developing a research and public policy program focused on accelerating the transition to a sustainable global financial system. With an enhanced focus on asset owners, a stronger voice on responsible investment issues and a new research programme, we will be developing practical, action-oriented research and analysis, accompanied by public policy recommendations that our signatories can drive forward.
Why are asset owners such an important focus of this new strategy?
While the Initiative has always been focused on responding to the needs of asset owners seeking to implement the Principles, it was recognised during our strategy process – again – that asset owners really do hold the key to driving responsible investment throughout the investment chain (and in the public policy sphere), and that empowering them to act had to remain at the top of our list of priorities. Most of the problems we face are a combination of short-termism and principal-agent problems. Asset owners are the only group within the investment chain that can really take these on.
Asset owners face unique challenges generating sustainable long-term returns for their beneficiaries. The practices that led to the financial crisis rewarded short-term gains at the expense of long-term returns, and demonstrated that asset owners are not always well served by their agents, who are often incentivised to focus on short-term rather than long-term performance. This needs to change if we are to build a financial system that is truly sustainable, and asset owners need to lead that change.
The PRI has already made a solid start in this area over the last five years. We have published guidance for asset owners seeking to integrate ESG into their manager selection, agreements and monitoring, and our Universal Owner report in conjunction with UNEP FI in 2011 explored the impact that social and environmental externalities are likely to have on large, asset owner portfolios over time.
Asset owners are already using the findings of our annual reporting and assessment process in discussions with their investment managers to help determine which managers are implementing responsible investment thoroughly, and the new reporting framework will provide additional tools and outputs for monitoring and communicating investment managers’ responsible investment activities to clients and beneficiaries.
Why is the PRI Initiative well placed to contribute to this debate?
think we are uniquely positioned to contribute to this debate because the PRI is a global network of investors led by asset owners, working alongside our UN partners.
Many of the challenges that need to be resolved around short-termism and incentives require new ways of thinking, analysis and collective action.
It is in the long-term interests of investors that asset prices should reflect environmental and social costs, and that market frameworks promote stability within the financial system.
However, it is difficult for investors to address these challenges through their own investment processes, or through individual action at the public policy level. Many of these issues are inherently collective action problems and require collective action solutions. As a global network of investors with asset owner leadership and UN backing, and with platforms for collaboration such as the Clearinghouse, the PRI is well placed to bridge these communities and stimulate the debate globally.
So how will your new approach help investors?
We are in the early stages of exploring how we might address these new priorities, and the consultation we plan to undertake with signatories in the second half of 2012, ahead of the launch of our new research and public policy work stream, will help to define the scope and direction of this new focus. We expect insights and recommendations from our research programme to flow directly into PRI’s implementation support and collaborative engagement activities, enabling signatories to capture their practical benefits in their investment and ownership activities.
We will continue to do what we have been doing previously, and doing it better, and the new activities are an enhancement to our activities rather than a completely new direction.
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