Ethical Performance
inside intelligence for responsible business


the UN’s Principles for Responsible Investment are a welcome initiative

May 2006

The last thing corporate social responsibility needs is a new acronym. That said, the Principles for Responsible Investment – PRI for short – launched last month in New York (see page one) are a massive boost for sustainable investment. A group of the world’s largest institutional investors, principally pension funds, has agreed to follow a set of common guidelines when they assess social, environmental and governance risks and opportunities, and to apply these principles to all investment functions – not just their socially responsible investment products.

The principles fit the prevailing mood, providing investors with a framework in which to take a long-term view of a company’s prospects, but still leave room for manoeuvre: under their comply-or-explain approach, institutional investors can choose how to put the six principles into practice, reporting how they do this while providing an explanation where they do not comply. This minimizes the compliance burden. The principles also reaffirm the primacy of fiduciary responsibility, declaring that because environmental, social and governance issues can affect investment portfolio performance, investors acting in the interest of beneficiaries need to take them into account.

This is a top-down initiative, with commitment from the institutional heads. It is top-down in another way too: in the investment industry food chain, institutional investors are the big beasts. Their embrace of the principles will prompt investment management companies, analysts and consultants to develop new products. These in turn will be repackaged and sold on to other clients, leading to change elsewhere in the industry. The principles talk coolly of ‘revisiting relationships’ with service providers – a polite way of saying that if the providers are not up to scratch, they risk losing the business.

Inevitably, there are omissions. Tougher disclosure requirements would make it easier for third parties, including beneficiaries, to identify how funds consider environmental, social and governance risks for asset management purposes.

What are the implications for companies? The principles spell out ‘possible action’ by investors, among them engagement and the exercise of voting rights. Asking companies to put more non-financial data in the annual report is a familiar request from SRI investors, but not as a mainstream investment demand. These principles are voluntary, aspirational and not prescriptive, yet their introduction may be seen in future years as the tipping point at which the main body of investors began giving serious consideration to environmental, social and governance issues.


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