By Lorenzo Saa, former Chief Signatory Relations Officer, PRI
Lorenzo Saa, the PRI’s former Chief Signatory Relations Officer, reflects on the monumental shifts in responsible investment during his recently ended 14-year PRI tenure and shares his views on what the PRI’s, and the responsible investment industry’s, next ambitions should be in light of the PRI in a Changing World consultation.
It is hard to believe how the responsible investment (RI) space has changed since the 2008-2009 financial crisis. Right in the midst of it, I left the private sector to join the newly formed PRI with high ambitions of challenging the status quo. I was frustrated by sustainability roles being mostly marketing stunts (where the CEO office was far away from the topic) and worried that sustainable investment was just the purview of passionate individual ethical investors.
Fourteen years later, I feel that with the work of stakeholders, signatories and my former colleagues, those ambitions have been achieved. The world is now taking RI seriously; many sustainability jobs are core to the business - reporting frequently straight into the CEO or CIO - and many policy makers are highly engaged with sustainability issues. There are now about 5,500 signatories compared to about 300 when I started at PRI!
However, clearly the glass is only half full. The effects of all these changes are still nowhere near where they need to be, and the goals of the Paris Agreement and the SDGs are disappointingly getting farther from our reach. It is within this setting that it is important for the PRI and RI to set its next ambitions. PRI’s open consultation on PRI in a Changing World is a key moment for all signatories and stakeholders to share their views. Below are some of my own reflections.
Be clear about outcomes
As Stuart Kirk crisply highlights in his recent article, there continues to be confusion around the concept of RI which allows many – willingly or not – to greenwash. Most of us would accept the definition of RI “as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.” However, this definition does not make any mention of the ultimate outcomes of those decisions, while beneficiaries, regulators and many institutional investors now assume it does, or believe it should. To many, especially within the European context, being a responsible investor is more than just analysing and engaging on ESG factors (i.e., ESG integration).
To address this confusion, it seems that two important steps are needed. First, there is a need for regulators and industry bodies to provide a set of global definitions that allow investors to clearly distinguish whether their funds are invested based on reviewing ESG practices or on achieving ESG outcomes. In a way, the European regulations are already trying to do this - with the distinction of Article 8 and 9 funds under the Sustainable Finance Disclosure Regulation (SFDR) - but theirs is not a global definition and it is itself open to interpretation (see this recent Responsible Investor article on how some funds have moved between Article 8 and 9 without changing their underlying strategy). Interestingly, the UK government is now trying to tackle this issue with their own Sustainability Disclosure Requirements (SDR) regulation and labelling.
Second, especially in the absence of clear definitions, investors need to be transparent if they are making investment decisions based on aligning and/or achieving ESG outcomes and, if so, signal if/how this could impact returns. This is important because, despite the widening of the concept of fiduciary duty (see A Legal Framework for Impact), in certain jurisdictions the link between fiduciary duty and outcomes may not always be aligned. More importantly, clients want to know the ultimate drivers of their investments. Transparency and honest communications with clients are key to ensure all our hard work to make sustainable investing mainstream is not lost on claims of “woke” criticism and mission creep. The decreasing number of clients that do not want to focus on outcomes should not be forced by institutional investors, but by their regulators, and even regulators should aim to do so in an appropriate and commensurate manner. This should allow the increasing number of investors that do align with the growing number of governmental sustainability goals, the targets for economic transition and the assessments of environmental and social impact, to do so without market confusion.
Keep it global
As globalisation is in retreat, I see a big risk that our large systemic issues, such as climate change, biodiversity, migration, data protection, etc, become harder or even impossible to solve. A global industry like asset management will find it harder to operate sustainably if global policy frameworks, definitions and standards significantly diverge. To counter this, the sustainable investment world needs to make an extra effort to keep the conversation global, while understanding and respecting local/regional needs.
In fact, a global approach does not per se require an identical set up. Different markets have different levels of advancement (e.g., some of the challenges with data in emerging markets), a different focus on issues (e.g., the focus on private prisons and DEI in the US), and different approaches to responsible investments (e.g., different weighting of screening and engagement). These should be recognised and treated differently. However, a global approach should still be designed to ensure that these different elements are either coming together or that they are running in parallel in a complementary fashion.
There are several encouraging signs towards this global alignment. Despite some of its flaws and its unhelpful protectionist stance, the Inflation Reduction Act (IRA) in the US tackles climate change from many different angles and brings the EU and US efforts on climate closer than under the Trump administration. COP27, though wanting on the emissions side, took an important step towards including the Developed and Emerging Markets by recognising “damage and loss”. Moreover, the greater attention on biodiversity on a global scale highlighted at COP15 in Montreal adds to the picture of global coordinated action. Specifically for investors, it is positive to see the relative convergence of global taxonomies and stewardship codes, as well as the progress under the International Financial Reporting Standards (IFRS) in bringing together and standardising the different ESG reporting initiatives. Even in private markets, initiatives that drive global convergence, like the Initiative Climat International (iCI) are gaining further momentum.
In spotlighting some of these positives, I encourage us all to keep fighting the many and strong gravitational forces that push us in the opposite direction. The concepts of having many flowers bloom works in most settings, but for facing our world challenges today, thinking globally is key for our success and global survival. As Bruno Le Maire just said in responding to some of countries uncoordinated industrial policies: “The key question is not China First, US First, Europe First. The key question for all of us is Climate First”.
Bring on RI Reporting 3.0
Responsible investors’ reporting has grown significantly in the past 14 years.
When I started at the PRI, institutional investors faced no significant regulatory RI reporting requirement. I remember when only a couple of hundred PRI signatories chose voluntarily to report by completing a single pathway basic survey. Since then, things have clearly changed. Institutional investors must now report to multiple regulatory authorities and, if they are a PRI signatory, they must also report to an annual reporting framework covering multiple asset classes and approaches. More than 3,000 institutional investors reported to the last PRI reporting cycle. This allows clients and stakeholders to have greater visibility of investors’ activities, driving accountability.
However, reporting requirements need to further step up to meet today’s constantly evolving challenges. Bring on RI reporting 3.0!
Capture outputs and outcomes, not only policies and processes
Fourteen years ago, ESG corporate data was limited and therefore reporting of ESG information, and its outputs or outcomes, was not always easy to calculate (though it was easier than some deniers would have said). This meant that most institutional investor reporting requirements at the time, including those of the PRI, were primarily about policies and processes.
Today, by and large, obtaining quality data is no longer such a challenge. Institutional investors in public markets are obtaining data from companies directly, or from a growing and sophisticated set of data providers that collect or estimate the data via machine learning that can even challenge/fix data inconsistency. The establishment of the International Sustainability Standards Board (ISSB) is likely to address the current excessive abundance of corporate reporting platforms and standards, bringing about stronger and more consistent datasets.
For this reason, it seems important that institutional investors can and should report beyond their processes and policies to include their outputs and outcomes. With corporate data more readily available, this should be increasingly possible not only at a fund level - as the EU regulators are asking (for example with SFDR) - but also at the aggregate portfolio and institutional level. PRI and other investor reporting initiatives could therefore choose to either maintain, for learning and accountability purposes, the process and practices monitoring function; or shift their focus to outcomes and support signatories or service providers in capturing the process and practices themselves.
Align the reporting requirements and alleviate the reporting burden
As mentioned, institutional investors are now being asked to report multiple times to many different regulators, standard setters, and initiatives, each with different frameworks and requirements. The sheer size and diversity of reporting requirements are well captured in the PRI’s recently published research on ESG reporting requirements for investors covering 120 sustainable finance reporting instruments across five global reporting initiatives and nine jurisdictions: Australia, Canada, China, the European Union, France, Hong Kong, Japan, the UK and the US.
While reporting is rarely loved, the current situation is creating increasing frustration for investors that feel their resources are being distracted from the real work of being responsible investors. As we are doing for corporates, we now need to accelerate a convergence phase for investor reporting. This will need industry and regulators to first agree on a view of what investor reporting ought to capture and then to set commonly agreed reporting requirements. I would encourage PRI, as a partner to ISSB, and other stakeholders to continue to push for the standardisation of ESG reporting for investors thereby driving meaningful data and reporting across the whole investment chain.
In the interim, different regulators and RI initiatives should recognise duplications and inconsistency in RI reporting requirements and identify ways to alleviate the burden. This could include allowing investors to report on only some of the requirements and point to other reporting where there is reasonable overlap. Moreover, the industry could leverage on the increasing presence of technical solutions, such as data scraping, machine learning, XBRL, etc. that can identify reliable alternate data sources to supplement direct reporting and further alleviate the reporting burden.
********************
In conclusion, as I have seen in the past 14 years RI advancements beyond my wildest dreams, I remain convinced that in the coming years we will keep taking immense strides forward in this space. The challenge is immense. To ensure that we beat the clock, it is critical that 1) we push public policies and frameworks that are interoperable and drive global convergence towards solving systemic issues; 2) we ensure - via proper definitions and appropriate transparency – that clients are clear if, when and how their investments are aiming to achieving sustainability outcomes; and 3) we agree and converge on a common approach to RI reporting that - via a reasonable and data-driven approach - ensures that the top of the investment chain can drive accountability and positive change throughout the system.
If you are interested in sharing your views on how PRI can respond to the shifts that Lorenzo mentions we encourage you to join the PRI in a Changing World consultation, closing on January 27.
Lorenzo Saa can be reached at his LinkedIn account.
The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.
