PGIM’s Jackson: My top takeaways from PRI in Person
This year’s United Nations’ Principles for Responsible Investment (PRI) conference in Brazil was well-attended, positive and upbeat. It offered an optimistic outlook on progress despite ongoing shifts in global political and regulatory landscapes. While the global transition may be slower than needed to reach net zero by 2050, decarbonisation is underway and opening up many different and attractive investment opportunities.
Among an abundance of discussion and content, some of the standout themes of the conference included the growing recognition of systemic risks; complexities of mobilising capital for a low-carbon economy; the role of the insurance sector; and the importance of collaboration across governments, investors, and development banks to advance global sustainability goals.
Systemic risks still widely misunderstood
There was general consensus that systemic risks remain inadequately understood by many investors. While most are adept at managing idiosyncratic and systematic risks, they are less certain on how to address systemic risks. These require big-picture thinking and innovative methods of engagement, areas where investors and companies are still playing catch-up.
There was a strong focus on the need for investors to rethink how they approach investment and stewardship. Suggestions included shifting the focus from relative returns to absolute returns so performance can be measured in absolute terms rather than being dependent on traditional benchmarks that carry and may even exacerbate systemic risks, as well as prioritising broader market performance (beta) over individual asset performance (alpha).
Other suggestions include moving stewardship from company-specific concerns to broader policy issues and using benchmarks that account for systemic risks, such as climate-focused indices. These were all seen as approaches that could incentivise integration of systemic risk considerations into the investment process. Managing systemic impacts and negative externalities, like environmental damage or social inequality, was also seen as a way to improve long-term returns.
Finally, it was noted that sustainability approaches needed to be tailored to different asset classes, as each comes with its own unique challenges and limitations. This tailored approach is essential for effectively integrating systemic risk considerations into investment decisions.
The low-carbon economy and mobilising capital in public-private partnerships
Investment in the low-carbon economy was a major focus at the conference. The emissions intensity of the global economy is improving as governments and investors are increasingly backing climate technologies, green infrastructure, and blended finance models to scale climate solutions globally. While challenges remain – such as the need for more investments in climate-resilient infrastructure and in the global south, and the tension between local industrialisation aspirations and the cost of goods – the momentum is clear. Asia, in particular, plays a critical role in the transition.
Right now, there’s a unique opportunity to engage with regulators in the region, as they are eager for capital and open to collaboration. Asset owners in Asia are also rapidly building sophisticated sustainability teams, adopting global frameworks, and leading in the development of low-carbon technologies, positioning the region as a key player in the global transition to a low-carbon economy.
A recurring theme was the need for governments to clearly articulate their infrastructure needs to allow investors to advise on how to attract capital. Greater coordination between governments, multilateral development banks, and the private sector is essential to scale financing for sustainable projects. Some larger countries are making progress in this area, but smaller nations continue to face challenges.
There is now more clarity on how to deploy different types of capital – for example commercial capital to scale up proven solutions and catalytic capital to develop new solutions. Encouragingly, emerging markets are increasingly investing their own resources into low carbon infrastructure projects for the benefit of their populations, moving away from reliance on transfers from developed nations and adopting a more pragmatic approach.
The role of the insurance industry
The insurance sector was identified as a critical blind spot. Achieving many sustainability goals is impossible without reimagining the role of insurers in de-risking the low-carbon transition. The sector has the potential to play a pivotal role in de-risking the financing of green projects, but this requires turning existing pilot initiatives into scalable, repeatable processes. Importantly, insurers need to be involved early in project planning so they can become an integral part of the capital structure, rather than being treated as a last-minute checkbox. However, investors often remain unaware of the significant role insurers can play in this process.
Climate change is reshaping underwriting practices, with more regions in core markets becoming uninsurable as losses for insurers increasingly outpace premiums. Flood risk modelling has been a focus for insurers, but a growing issue is the shift from seasonal risks to year-round risks, as policy claims now frequently occur outside traditional risk periods.
Insurability is becoming a key factor in investment decisions, with questions arising about whether assets will remain insurable over the next decade or two. There is also a significant misalignment between assessing the resilience of individual assets versus the resilience of a broader community. Current risk assessments often fail to account for community-level risks, which are critical for long-term sustainability.