The PRI seeks to pull off a tricky balancing actSeptember 2008
The United Nations Principles for Responsible Investment have passed the two-year mark. EP talks to executive director James Gifford about investor collaboration.
The UN Principles for Responsible Investment (PRI) started in April 2006 with 40 asset-owner and investment-manager signatories. Now there are 381, representing $15trillion (£8,000billion) in assets under management.
‘At around 10 per cent of global capital after two years, this is impressive’, says PRI executive director James Gifford. The organization spent just $430,000 in 2007/2008 – derived solely from signatories’ voluntary contributions – so the degree of leverage is remarkable. However, it would be less unusual in the pressure group world, where the 37–year old Australian, who is completing a PhD on shareholder engagement, cut his teeth as an online activist for a sustainable logging campaign that targeted pension funds.
The PRI initiative seeks to help investors integrate consideration of environmental, social and governance (ESG) issues into investment decision-making and ownership practices. Asset owners – pension funds, government reserve funds, insurance companies and other institutional investors, and investment managers and consultants – agree to abide by six principles (see box). Most find the first principle – incorporating ESG issues into investment analysis – hardest to implement, particularly for asset classes other than listed equities.
Gifford says there has been insufficient peer pressure in this area. ‘ESG issues haven’t been taken into account to the extent they should have been. There has been a market failure in terms of investors’, he says.
Judging by the PRI’s latest progress report, that failure is beginning to be addressed. A third of the 156 signatory respondents say they intend to ask their service providers to take greater account of ESG issues, three-quarters are talking to policy makers and industry regulators about the subject, and 70 per cent now ask companies to provide standardized non-financial data.
So how much of the PRI’s $13tn is actually managed along SRI lines at present? That, says Gifford, misses the point. ‘The idea is to engage the mainstream investors. We have tried to do a difficult balancing act; on the one hand having a set of principles which were meaningless but that everyone could agree to, and on the other having principles that were too prescriptive, defining specific processes nobody would have agreed to.
‘We have aimed for the grey area in the middle, providing a forum for collaboration while leaving room for beginners.’
Collaboration, says Gifford, enables newcomers to learn from experienced hands, it keeps costs down – ESG analysis is expensive – and also increases the likelihood that companies will accede to investors’ demands. A key tool is The PRI Engagement Clearing House, set up in late 2006 as the ‘first ever global collaboration space for investors’. Originally a bulletin board, it evolved into a password-protected online forum in which investors post proposals to engage with a company or sector, or on an issue.
Half of asset-owner signatories now use the clearing house ‘to a medium or large extent’ and more plan to. An ad hoc investor alliance initiated by Morley Fund Management, for instance, has sought to encourage corporate disclosure on the progress of commitments made to the UN Global Compact. Seventeen of 78 laggard firms subsequently ‘re-engaged’ with the Compact.
Separately, signatories led by Hermes jointly engaged the iron and steel industry on forced labour in their supply chains at charcoal plants in
Proxy voting – another area where investors acting in concert are more likely to get results – also saw increased levels of PRI-brokered investor collaboration, particularly in
Precise details of concrete outcomes, however, are decidedly sketchy. Founder member Insight Investment says the PRI and signatories need to focus, over time, on engagement outcomes achieved by members ‘rather than simply reporting on the process used [and] numbers of companies engaged’. Minimum commitments for signatories, such as publication of a responsible investment policy, would be a ‘valuable step’ and all should be asked to explain how and whether they live up to the principles on a ‘comply or explain’ basis. At some point the PRI and its signatories will have to reveal more of what they do – just as they expect of companies.
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