Implementation of the Principles by small and resource-constrained signatories

PRI’s small fund signatories are a diverse group that includes pension funds, foundations and endowments, mainstream investment managers and themed fund managers. The PRI conducts an annual analysis of the implementation of the Principles by this group based on responses to the Reporting and Assessment survey. Through this analysis we have found some key characteristics of small fund signatories:

• They are largely mainstream investment managers and pension funds.
• Small investment managers use internal staff for active ownership activities.
• Small asset owners tend to outsource asset management and active ownership activities.
• ESG integration is more advanced in listed equities than other asset classes.
• Only 22% of small signatories have a dedicated RI/ESG specialist within the organisation, compared to 78% of larger signatories.
• They have significantly lower levels of disclosure (Principle 6) compared to larger signatories.

Small fund signatories behave and perform similarly or better compared to large funds in some areas of implementation, for example on ESG integration in listed equities. However in other areas, such as reporting, small funds under perform. The paragraphs below provide a snapshot of how small fund signatories as a group are implementing each of the Principles. For a more detailed analysis, please see the Small Funds Assessment Analysis.

Principle 1

ESG integration in small funds that are actively managed by internal staff varies widely across asset classes. Like larger signatories, listed equity is the main asset class in which integration of RI/ESG issues in investment decision-making processes takes place. Small investment managers integrate RI/ESG issues in 84% of listed equity investments. The corresponding figure for large investment managers is 73%. However the few small asset owners that do manage listed equity investments internally integrate RI/ESG issues in 93% of their listed equities.

Small investment managers integrate RI/ESG in a larger portion of their fixed income investments compared to larger investment managers. Small asset owners, on the other hand, report that they are not integrating RI/ESG issues into asset classes other than listed equity.

Principle 2

Small investment managers are similar to larger investment managers in how they organise their voting activities: internal staff make and implement the majority of voting decisions. The picture is quite different for small asset owners, where 69% responded that external managers and service providers are the most important voting decisionmakers. In larger asset owners the figure is closer to 50%. However, 17% of small funds do not monitor whether their votes are cast in accordance with their policy, and 19% stated they monitor only to a small extent. The majority of investment managers use internal staff to engage with companies, while most asset owners outsource engagement activities to external managers or providers.

Principle 3

Internal staff at small funds, like their larger counterparts, are more likely to ask investee companies to disclose their ESG policies, practices and performance. Seventy per cent of small funds use internal staff to request and collect ESG information, compared to 78% of large funds.

Principle 4

For signatories that have most of their assets managed by external investment managers, it is important to ensure that managers have ESG capabilities. This can be achieved by including RI/ESG requirements in contractual agreements with external investment managers. In this regard small funds perform better than large funds, with 40% of small funds referencing ESG issues in all contracts with investment managers, and 30% for some contractual agreements. Corresponding figures for large funds are 30% and 34% respectively.

Principle 5

Collaboration with other investors can help small funds implement responsible investment activities. This is because collaboration reduces costs and man hours while increasing the ability to influence investee companies. By collaborating, investors can pool resources and learn best practice from their peers. Yet only 31% of small funds responded that they collaborate to a large extent with other investors, compared to 38% of large funds. Fourteen per cent of small funds responded that they do not collaborate.

Of the small funds that do collaborate, 42% responded they collaborate most on Principle 1. This may involve collaborating on developing ESGrelated tools and metrics. Surprisingly, only 26% of small funds responded that they collaborate most on Principle 2 where options for working together include joining collaborative engagement initiatives, or participating in the development of policy, regulation and standard-setting related to active ownership.

Principle 6

Reporting is a time-consuming activity and it is not surprising that the mean score on Principle 6 for small funds is lower than larger funds: 46% for small funds and 60% for larger funds. However, some small funds are now disclosing all or some of their responsible investment policies and activities in detail. While 42% of small funds publicly disclosed their voting policy in 2009, only 27% publicly disclosed their voting record. The corresponding figures for larger funds were 60% and 55%. Only 31% of small funds disclosed their active ownership and engagement policies publicly, and 23% disclosed non-voting RI/ESG issue-related active ownership and engagement activities, results and progress.

It is clear that resource constraints can be an obstacle for small signatories trying to implement the PRI. Few small signatories have dedicated in-house RI/ESG specialists, making it difficult to develop and implement responsible investment policies and find the time to monitor and report on activities.

However, a significant number of small funds, despite their reduced resources, are showing real innovation in implementing the Principles. The nine case studies that follow highlight some of these examples. All case studies include key takeaways providing a practical resource for other signatories.