Annual Report 2016

Positioning the PRI for the next 10 years

Martin Skancke, Board Chair

The past year has been a milestone one for the PRI. It’s been ten years since the Principles were founded at the New York Stock Exchange in April 2006, so there’s never been a better time to look back on not just the year that’s gone, but on all of the initiative’s achievements to date.

As part of this, we commissioned an independent evaluation of our effectiveness so far. The report found that in the space of ten years, the PRI “has become the leading global investors’ platform for learning, engagement and the sharing of best practices”, and that it is “appreciated for being a big tent organisation that helps new signatories embrace the basics of responsible investment on the one hand and facilitates a race to the top amongst signatories on the other”.

“The PRI is today widely recognised for its leadership role in creating global awareness about responsible investment and helping progress responsible investment within the core processes of investors around the world.”

From Principles to performance: An independent evaluation of the PRI’s achievements and challenges at ten years

This is encouraging, but much more work lies ahead.

We see many areas for improvement, and it’s important as we head into the next ten years for us to understand where we can and should focus our efforts. In line with our Mission “to achieve a sustainable global financial system”, we are canvassing signatory views on which obstacles to a sustainable financial system the PRI and its signatories should address. We will reflect on where the PRI’s strengths best place it to have impact, and where we can align with other organisations. The consultation also invites signatories to reflect on to what extent the PRI should use the Sustainable Development Goals as a framework for its real world impact, whether the Principles should be updated to reflect the sustainable financial system objective referred to in the Mission, and how the PRI should define and measure its success over the coming years.

Attracting 1,500 signatories that collectively manage US$60 trillion indicates that responsible investment has reached unprecedented scale. As the PRI has matured, we’ve seen its authority grow as an increasingly recognised and respected representative of the investor perspective on major platforms: this year, we are a knowledge partner to the G20 Green Finance Study Group, we are working with the OECD on scaling up green investment and at COP21 we were, amongst many contributions, a strategic partner to the official COP21 business event – the UN’s Caring for Climate Business Forum. The PRI is also supporting the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

As the collective influence of the signatory base grows, we have to continue pursuing greater signatory accountability. The depth of responsible investment implementation varies significantly across the signatory base, and we must be honest in acknowledging that much more progress is needed. Alongside increased support for signatories’ efforts to make progress, we need to hold signatories to the commitments to progress that they make upon signing. The value that PRI membership represents cannot be undermined by the few that would look to use the Principles as a badge to be bought rather than a commitment to act.

Last year we said that we would be seeking perspectives on mechanisms for this, and through our Strengthening accountability, recognising diversity consultation, and the global series of workshops that followed, we have done so. We now know that a majority of signatories support: accountability measures for organisations making no effort to implement the Principles, delisting signatories that act in a manner that contravenes the Principles’ spirit and showcasing signatories that are leading the way. We look forward to sharing our plans for these and other issues in the Blueprint for Responsible Investment coming next year.

I thank signatories for their extensive feedback and support in continuing to shape the next decade of responsible investment and of the PRI, and the PRI Executive for their excellent work over the past year. My thanks also go to the members of the PRI Board, including those who have left us this year: Masaru Arai, David Atkin and Eric Wetlaufer.

I hope you find this account of our year productive, and we remain responsive to your input on the issues affecting us all in the years ahead.

Delivering for signatories

Fiona Reynolds, Managing Director

This year has once again shown why responsible investment continues to draw the attention of institutional investors worldwide. Corporate behaviour around environmental, social and governance issues such as harmful emissions, working conditions and aggressive tax strategies threaten corporate performance and in turn investor returns.

We continue to target our work on the environmental, social and governance issues that are most pressing for signatories. This has included producing guidance on why and how to engage with investee companies on their tax practices, and bringing together a worldwide group of more than 60 investors to sign a statement outlining expectations of how companies lobby policy makers on issues relating to climate change.

All the work we’ve done this year has been aimed at delivering against our strategic objectives in a way that is relevant and useful to signatories.

Our ongoing focus on asset owners has seen us examine their role at the top of the investment chain, as described in How asset owners can drive responsible investment, which highlights to investors and policy makers the multiplier effect that pressure for responsible investment carries when it comes from these crucial players.

We have attracted 26 new asset owner signatories this year, including the world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF). We need to ensure we are producing the tools and support that these organisations need: as promised last year, we have recruited a team specifically to produce asset owner resources, and we have established an advisory committee of senior individuals from a global set of asset owner signatories to guide its work. We look forward to sharing the first fruits of that new team with you in the year ahead.

We continue to produce practical tools for investors, including in the biggest asset classes. We have collected more than 40 examples of investor practice in integrating ESG factors into listed equity investing, which will form the backbone of the eagerly anticipated follow-up to 2013’s Integrated analysis.

In fixed income, after completing our case study series, we have expanded into addressing the crucial systemic issue for the asset class: the role of credit rating agencies. Bringing credit rating agencies including S&P Global Ratings and Moody’s together with more than 100 investors to commit to enhancing how ESG factors are considered in the assessment of creditworthiness is a potentially game-changing move in how responsible investment is incorporated into the world’s US$100 trillion debt capital markets.

The credit ratings work is an example of how, to be effective for signatories, our work must include looking at market participants and structures that exist outside investors’ walls but have a direct impact on their portfolio considerations. Fiduciary duty in the 21st century found that failing to integrate long-term value drivers, including ESG issues, is a failure of fiduciary duty. This, our submissions to public policy consultations and our part in the Sustainable Stock Exchanges initiative all contribute to ensuring that signatories’ efforts to progress responsible investment aren’t hindered by obstacles in the markets in which they operate. The potential for more work in this area is one of the key issues we are discussing with signatories through the Sustainable financial system, Principles, Impact consultation.

The PRI is a global organisation with an increasingly local footprint. This year we have built on the suite of network managers providing on-the-ground support to signatories across the world by extending our reach to regions that our strategy defines as key. Leveraging the growth of responsible investment so far in the US and exploring the enormous remaining untapped potential there, we opened our office in New York; building on the rapidly growing interest in responsible investment in Asia, we merged with the Association for Sustainable & Responsible Investment in Asia (ASrIA) to establish a presence in Hong Kong.

As with many London-headquartered operations, the UK’s referendum decision on 23 June to leave the European Union has left the PRI with many unanswered questions and uncertainties. The referendum has been an issue on our risk register for some time and we will keep monitoring any potential impact on our initiative, such as signatory growth, fee income, staff costs and our reserving policy, as well as any implications for our European staff based in London and the broader sentiment of all staff on London as a place to live and work for the long term.

I must thank all of our staff for their effort in providing the depth and breadth of services that support signatories in their efforts to implement the Principles. Most importantly I thank our signatories and stakeholders who through their involvement with the PRI continue to push responsible investment forwards. Their efforts have been greater than ever in this 10th anniversary year – in the strongest response we’ve ever had to a signatory consultation, more than 500 people responded to our Strengthening accountability, recognising diversity consultation, and more than 850 people attended one of the 21 regional workshops in our global series. I thank them for their considered input, which will help guide our work over the next 10 years.

Our three-year strategy structures everything we do. As we look further into the distance with our upcoming 10-year Blueprint for Responsible Investment, we will retain this focus, continuing to underpin it with three-year strategies that will include metrics to measure our success, and, crucially, ensure that we are accountable to our signatories.