Quarterly overview

Last month, as leaders prepared to gather in Canada for the 2018 G7 meeting, 319 investors with more than US$28 trillion in assets called on world governments to scale up climate action to achieve the goals of the Paris Agreement. We need to keep raising global ambitions to cut CO2 and investor engagement is essential to this process. The transition from a high carbon to a low-carbon economy is inevitable and there is no doubt that policymakers are feeling increased pressure to act on this issue.

In Europe, the PRI welcomed the European Commission releasing the first legislative package under the Action Plan for Financing Sustainable Growth, which signals opportunities for investment managers to develop new products for green assets as the world looks to transition from a high carbon to a low-carbon economy.

To help investors engage with portfolio companies on their direct and indirect lobbying practices related to climate policy, in May, we released an investor guide on corporate climate lobbying. As all of us know, negative and resistant corporate interest, often represented by third-party organisations, can hinder policy action that aims to mitigate the impacts of climate change. This can cause a number of issues for investors including legal and reputational risks, and long-term portfolio volatility.

In order to provide investors with the knowledge they need to invest in low carbon, the PRI produced a guide: How to invest in the low-carbon economy, which highlights the investment strategies available to investors in their efforts to align their investment portfolios with a lower carbon, more climate-resilient economy. It is designed for investors that have developed (or are in the process of building) their climate-related policies and processes, and are moving to implement them (particularly, the implications for investment allocations).

Investors are increasingly scrutinising corporate engagement on climate policy as it plays a critical role in helping governments create practical climate policy solutions. But, while we focus on the physical risks around climate change, we also need to be mindful of other impacts. We need to look beyond the physical environmental issues and consider the social aspects: what is called the ‘just transition’. We also need to ensure that workers and communities in fossil fuel-dependent economies have a pathway to prosperity. In the new and emerging work of tomorrow, it is important that these jobs have as good if not better conditions than the sectors we are leaving: highly organised with good salaries, pensions and healthcare. The PRI contributed to the report, Investing in a just transition: why investors need to integrate a social dimension into their climate strategies and how they could take action.

As all of you know, proxy voting season has just drawn to a close. In response to demand for more dedicated proxy voting tools, the PRI built an online form for signatories to – voluntarily – communicate how they intend to vote on shareholder proposals at company AGMs. It aims to increase transparency across the industry, in line with Principles two and six as well as the PRI’s 10-year Blueprint.

Looking beyond climate issues, we are increasing focusing on new ESG issues such as cybersecurity. In light of recent high-profile data breaches at companies such as Facebook and Sony, investors are increasingly aware of the need to assess cybersecurity risk within their investment portfolios. The investor case for engaging on cybersecurity is clear: a data breach can have a material impact on share price, cause business disruptions and impact customer trust. While some investors comprehensively engage with portfolio companies on this to mitigate risks and identify opportunities, many more are only just recognising the need to do so.

We were very pleased to release our report, Shifting perceptions: ESG, credit risk and ratings – part 2: exploring the disconnects, examining the gaps between investors and credit ratings agencies (CRAs) highlighted in its seminal work, Shifting perceptions: ESG, credit risk and ratings – part 1: the state of play, last year. Our new report includes input from a series of roundtables held round the world. Although ESG factors are not new to credit risk analysis the extent to which they are explicitly and systematically considered by fixed income investors is. They are also of increasing interest to policy makers amid growing realisation that ESG issues, such as climate change, can represent systemic risks to financial markets. Ongoing dialogue is beginning to address misconceptions, including the difference between assessing the impact of ESG factors on credit risk and evaluating a bond issuer’s ESG exposure, or versus rules-based investing (such as exclusion). It is also highlighting the progress that CRAs – particularly the bigger players – are making through research and organisational changes, as well as transparency-related efforts and more explicit reference to ESG factors when these contribute to rating actions.

Update on new signatory growth

In the first quarter of our new financial year, we welcomed 118 new signatories, notably including asset owners: Swiss Life AG, the Employees’ Retirement System of the State of Hawaii, AG2R La Mondiale and LGPS Central. In June, the total signatory base hit 2,000, representing over US$82 trillion of assets.

In June, the PRI Board convened in Beijing followed by a series of high-level stakeholder meetings. The Board’s presence in the region reflects the PRI’s increasing signatory base of prominent, local investment managers, including China Asset Management Co. Ltd., E Fund Management Co. Ltd, China Southern Asset Management, Harvest Fund Management Co. Ltd, Penghua Fund Management Co. Ltd and Hwabao WP Fund Management Co. Ltd. We have continued to expand our team of local signatory managers to meet the demands of our fast-growing global network, hiring a head of Latin America who is based in Medellin and will serve the Spanish speaking countries in the region, especially Colombia, Chile and Mexico.

We also hired a head of Southern Europe based in Madrid who will focus on Spain, Italy and Portugal and added a new head of Brazil.

A quick look ahead

Before we know, it will be time for PRI in Person, which, as many of you know, takes place at the same time as the Global California Action Summit. We have approximately 1200 attendees, making this our biggest ever PRI in Person. We look forward to seeing many of you in San Francisco in September.