The expert explains: What is the right way to promote responsible investing?
As global leaders gather in Paris for the UN Climate Change Conference (COP21), investors are being encouraged to sign up to the Montréal Carbon Pledge, under which asset owners and investment managers commit to measure and publicly disclose the carbon footprint of their investment portfolio on an annual basis. What is the UN-supported Principles for Responsible Investment (PRI) Initiative, and can it provide an effective tool to promote responsible investing in Africa and beyond? For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector.
As global leaders gather in Paris for the UN Climate Change Conference (COP21), investors are being encouraged to sign up to the Montréal Carbon Pledge, under which asset owners and investment managers commit to measure and publicly disclose the carbon footprint of their investment portfolio on an annual basis. The Pledge is overseen by the UN-Supported Principles for Responsible Investment (PRI) Initiative, and by the start of COP21 it had already attracted commitments from over 120 investors with over US$10 trillion in assets under management. Support for the Montréal Carbon Pledge comes from investors across South Africa, Europe, the USA, Canada, Australia, Japan and Singapore.
So what is the UN-supported Principles for Responsible Investment (PRI) Initiative, and can it provide an effective tool to promote responsible investing in Africa and beyond? The Initiative dates back to early 2005, when Kofi Annan, who was UN Secretary-General at the time, invited a group of the world’s largest institutional investors, from 12 countries, to join a process to develop the Principles for Responsible Investment. The Principles were launched in April 2006 at the New York Stock Exchange.
The goal of the Initiative is to understand the implications of sustainability for investors and support signatories in incorporating these issues into their investment decision making and ownership practices, leading to a more sustainable global financial system. There are currently around 1380 signatories to the PRI Initiative among asset owners, investment managers and service providers, which have an estimated 59 US$ trillion of assets under management.
The six Principles were recently presented at the Africa Investment Funds and Asset Management (AIFAM) Forum in Mauritius, by Adrian Bertrand, Head of Africa, Networks & Global Outreach at UNPRI as follows:
Principle 1: We will incorporate ESG (environmental, social, and corporate governance) issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
How does the process work in practice? Speaking at the AIFAM Forum, Wanjiri Karima, Chairperson of the Investment Committee of the $500m Debswana Pension Fund in Botswana, explained how the six Principles were being ‘brought to life’ in South Africa. She explained that unions were brought into process, owning approximately 13% of Johannesburg Stock Exchange, and that they were asked what they wanted to do as an asset holder.
In South Africa, there was a focus on three main areas: water, and the impact it has on economies; transformation, looking at who owns what in South Africa and how ownership is being related to risk and opportunities for trade union members; and executive remuneration, looking at how much the CEO gets relative to those at the bottom and if there is any correlation between what the CEO gets and what value he brings. She said that they were looking at “bite-sized success”, to start with in these three areas and to show how it was possible to engage, report and come through with outcomes.
Can asset owners and investment managers collectively wield their power to make a real difference? The PRI Initiative and NASDAQ jointly undertook a study last year, using a worldwide sample of 379 listed companies, across all sectors, with a combined market capitalisation of $19tn, to uncover the presence of PRI signatories in companies in which they invest. The study revealed that signatories of the PRI on average hold nearly half of all the shares held by asset managers in those companies. This would suggest that there is scope for PRI investors to become active owners and speak with one voice to shape corporate policy.
Furthermore, the presence of PRI signatories reaches the highest levels of asset manager ownership in sectors facing some of the greatest sustainability challenges: mining, industry and utilities. For example, PRI signatories own an average of 49% of the shares held by asset managers in 58 industrial companies included in the study and an average of 50% asset manager ownership in 28 companies in the basic materials sector.
A key conclusion of the study was that a strong collaborative effort amongst responsible investors will be required to make a difference. To facilitate progress, the PRI has set up a collaborative platform, known as the Clearinghouse, engaging by company, issue, region or asset class. For example, the PRI’s coordinated engagement on managing risks in hydraulic fracturing includes 41 institutional investors with total assets under management of $5.1tn.
Other current topics include executive remuneration, corruption, water quality and scarcity and supply chain risk. One concrete example of responsible investors coming together to make a difference was a visit organized to textile factories in Bangladesh following the tragic collapse of the Rana Plaza complex in 2013 for discussions on improving working conditions with the garment industry and local producers.
So, if you are an asset owner or investment manager, is the PRI Initiative worth signing up to, and what are its limits? The main criticism of the PRI principles is that they are ‘voluntary’ and ‘aspirational’, so there is no real legal or regulatory sanction if an organisation signs up but fails to implement any real change. The official PRI website has stated that “There may be reputational risks associated with signing up and then failing to take any action at all, but the commitments are, for most signatories, a work in progress and a directional focus, rather than a prescriptive checklist with which to comply”. It transpires that only a few signatories have actually been de-listed for “failing to respond to an annual survey on their implementation of the principles.”
In terms of geographic reach, PRI ownership has been led largely by South-African and European financial institutions, with much work still to do in other parts of Africa, and also in North America, Australia and Asia Pacific. The definition of ESG issues can also vary from place to place.
Is the PRI Initiative worth the effort then? Wanjiri Karima commented at the AIFAM Forum that if we look at human nature – which is based around reward and punishment – then a ‘carrot and stick’ approach is likely to be the most effective, and that “what is not measured is not done”.
his is undoubtedly true. At the same time, there is currently no real global alternative to the PRI Initiative, and the number of signatories continues to grow year on year. For now, the PRI Initiative seems to be ‘the best show in town’ when it comes to responsible investing, but it may need more ‘teeth’ and more even geographic representation if it is to be credible over the longer term.