What are the Principles for Responsible Investment?
A UN-supported organisation that examines how investors can incorporate consideration of environmental, social and governance factors when investing. It is underpinned by six voluntary and aspirational principles that investors must commit to if they wish to sign up to it. Investors that sign up to the PRI include asset owners, investment managers and service providers.
The six principles that signatories commit to are:
- Principle 1: We will incorporate ESG 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.
The Principles are reasonably broad and most managers are now signatories, we have believed for a number of years that they will be tightened with time and we will see a few Fund Managers drop off the list, but have yet to see significant changes.
Figure 7 PRI signatories’ minimum requirements, reporting and assessment
What are the investment merits of PRI?
The PRI are focused on enhancing returns and better managing risks through responsible investment, rather than a broader, more impactful and/or ethical approach to responsible investing.
Of the six Principles, the first three relate to how a Fund Manager should invest and where ESG issues should be considered. The last three essentially relate back to the first three. If a Fund Manager is a signatory to the PRI, then an investor can assume ‘Integration’ is one of the fundamental responsible investing approaches applied by the Fund Manager. This is demonstrated through the Fund Manager’s commitment which starts with the belief that “…environmental, social, and corporate governance issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).” However, Research IP notes the degree of integration varies considerably.
For an investor the value of a Fund Manager being a PRI signatory is the increased transparency it provides. It makes it easier to assess the Fund Manager’s responsible investing practises within the reports provided via the PRI public signatory report page. A standard framework and consistent data points for the investment industry for ESG integration will make Fund Manager comparisons easier. It can provide a suitable reference point for investors and financial advisers to engage with Fund Managers.
Research IP consider signing up to the PRI as a bare minimum for any Fund Manager choosing to take ESG issues into consideration. Simply being a PRI signatory must be assessed further to distinguish a committed investment approach from a ‘greenwashed’ approach. A Fund Manager’s PRI rating could be used as a starting point to evaluate their commitment to responsible investing. The PRI rating should not be the only factor in this evaluation as there are many ways to implement the six principles. The scale and depth of ESG integration will vary across Fund Managers.
The following comparison shows the differences between the investment management approaches from two different Fund Managers that are signatories to the PRI.
Figure 8 Comparison of managed funds approaches from Fund Managers that are signatories to the PRI
The information in Figure 8 above was taken from publicly available Fund Manager Disclosures on Responsible Investing. To assess the implementation of their investment approach and evaluate the Fund Manager’s commitment to responsible investing, a deeper dive on the Fund Manager is required, as outlined earlier in Check the Pulse.
The answers to parts of our questions can be found in the PRI Transparency Reports, though parts require further engagement with the Fund Manager. For example, within the PRI assessment, Fund Managers can indicate which processes they use to ensure ESG integration is based on robust analysis; several answer boxes can be ticked including, “comprehensive ESG research is undertaken or sourced to determine companies’ activities and products” or “third-party ESG ratings are updated regularly”. Further research should follow to ascertain how comprehensive the research is and which third-party rating providers the Fund Manager uses.
The latest version of Beneath the Surface of Responsible Investing can be found here.
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Photo credits: Research IP, Jeff Dotson (Getty Images)