PRI Faces up to Changing World
Asset owner signatories and industry leaders reflect on next steps for the investor body, as board considers new strategy.
In early 2005, UN Secretary-General Kofi Annan invited a 20-strong group of global institutional investors to contribute to the development of the Principles for Responsible Investment (PRI).
The end result was the formal establishment of the PRI in 2006 – backed by investors collectively representing more than US$2 trillion in assets – to help the industry understand the implications of ESG and how to incorporate such themes into investment decision-making.
In the 18 years since, the PRI has borne witness to a rapidly shifting investment landscape, within which there has been widespread adoption of responsible investing practices by large asset owners and managers across the globe.
This has been driven in part by the efforts of industry bodies and networks like the PRI to build investor awareness and provide crucial guidance – slowly shaping the industry as we know it.
Growing pressure to mitigate existential threats like climate change means it’s more important than ever for investors to be supported when navigating this landscape.
“We are trying to change the planet – it’s not going to be quick or simple,” Sean Kidney, CEO of the Climate Bonds Initiative (CBI), tells ESG Investor. “The scale of change required to achieve [net zero] alone will require the biggest industrial revolution in the history of the human species.”
The PRI – which now boasts over 5,000 signatories representing more than US$120 trillion in assets – will continue to be “key” in ensuring investors live up to their part in driving future change, according to Kidney.
But that landscape is now maturing, and investor needs are evolving – meaning industry bodies must evolve alongside them.
As such, the PRI ran its aptly titled ‘Responding to a Changing World’ signatory consultation between March and May.
The board is now considering all feedback to inform its future strategy, which should be unveiled soon.
“I can’t say too much about the process now, but [the] approach builds on our past success, reflects the needs of the industry, and gives us a clear roadmap to move forwards,” says PRI CEO David Atkin.
Investor bodies such as the PRI have fundamentally been a good thing for the investment industry, according to Adam Matthews, Chief Responsible Investment Officer at the Church of England Pensions Board (COEPB).
“The PRI plays the very important role of convening investors around a common set of principles,” he says. “It has an increasingly enhanced role to play going forward. The open question is what that role should be.”
Taking stock
Before looking ahead, however, the PRI should also reflect on the role it has played thus far.
“It has been a cornerstone in shaping the global acceptance and appreciation of the role that ESG information can and should play in the investment process,” says Andrew Howard, Chief Investment Officer at Australian superannuation fund Equip Super. “[It] has [also] been a key driver in the take-up of responsible investment practices – especially across mainstream investors.”
A big part of the PRI’s role has also been to keep track of and share insights into key areas of focus, Howard adds.
For example, in 2022, the PRI reviewed the global ESG reporting landscape for investors – covering 120 reporting instruments across five global reporting initiatives and nine key jurisdictions – to identify major trends.
Last year, it also collaborated with the CFA Institute and Global Sustainable Investment Alliance (GSIA) to provide a new resource aimed at aligning terminology used in responsible investment – such as ESG integration, stewardship, and impact investing.
The PRI’s recent work on the degree of alignment between an investor’s fiduciary duty and the pursuit of sustainable goals – which covered Australia, Canada, Japan, the EU and the UK – found there were no legal barriers to pursuing positive sustainability outcomes. Failure to align may instead limit an investors’ long-term returns.
Part of the appeal of the PRI is the range of issues it covers, says Jan Kæraa Rasmussen, Head of ESG and Sustainability at PensionDanmark.
“It serves as an umbrella organisation that connects the dots between different sustainability impacts that investors want to make, or sustainability-related challenges [they] want to mitigate,” he says.
The group is also the driving force behind several initiatives open to signatories, including the nature-focused engagement initiative Spring and human rights-focused Advance. In tandem, it has actively supported the establishment of more recent investor initiatives and coalitions, such as Climate Action 100+ (CA100+) and the Net Zero Asset Owner Alliance (NZAOA).
“The PRI has been catalytic – it has defined norms of practice, built communities, and championed and pressed for higher standards of performance,” says Dr Rory Sullivan, CEO of global advisory firm Chronos Sustainability. “But its effectiveness has been underpinned by asset owners – in particular in making its membership a de facto requirement in the institutional market, and then holding asset managers to account for how they implement responsible investment.”
Future focus
There are nonetheless areas for improvement, according to Matthews.
“We do think there are areas where the PRI hasn’t been optimal – there’s some lesson learning still taking place, particularly on the reporting front, which is one of the PRI’s core functions,” he says.
However, one of the most critical issues identified by experts that needs to be addressed is the current dynamic between the PRI and other investor networks, bodies and coalitions in the sustainability space.
“The need for these NGOs and coalitions has increased, but there remains a lot of fragmentation between them, which is proving problematic for efficiency,” says Roger Urwin, Co-founder of the Thinking Ahead Institute (TAI).
Both Urwin and Sullivan agree that the PRI should more explicitly focus on working collaboratively with other bodies and networks to raise and align minimum standards of practice and performance across the industry, and champion investors demonstrating leadership.
“There remains a risk of proliferation,” agrees COEPB’s Matthews. “It’s important for investors who are members of multiple organisations to collectively step back and consider what the most optimal landscape is.”
In addition, the PRI should consider how it can best cater to all signatories, as responsible investment can look very different to investors depending on the context – such as the asset class an investor chooses to target.
“There is a need to widen the understanding of sustainable investing, both in terms of the size of investors and where they are based geographically,” says Kærra Rasmussen. “If only 10% of the world’s investors have that understanding, their efforts are not going to be as impactful.”
Results from the consultation the PRI ran earlier this year revealed divergence in signatories’ understanding of what responsible investment means. Sixty-three percent said responsible investment should combine the management of ESG risks and identifying sustainability outcomes in the future, compared to 41% focused on risk management and sustainability outcomes today. Thirty percent still see the management of ESG risks as the sole dimension of responsible investment.
“The PRI covers a range of different markets, organisations, operating contexts and business models,” says Atkin. “We’ve always known that a ‘one-size-fits-all’ approach wasn’t the right one, and the findings clearly substantiated this.”
Atkin confirms that the PRI would look to better tailor its guidance, reporting and assessments to fit all signatories’ needs. The organisation will also be extending its reach in developing markets, aiming to strengthen local responsible investing ecosystems. In addition, it will continue to offer the industry opportunities to collaborate through voluntary initiatives.
“The PRI could do more to convene top leadership from investment firms on sustainable finance – not just those already focused on ESG, sustainability and stewardship,” suggests Urwin.
There is also more work to be done on the availability and quality of sustainability-focused data. Most consultation respondents highlighted this as a barrier to investor action on sustainability outcomes.
“Given the significant data advances made over the past 18 years, it’s interesting that more of it may not have translated to better quality in an investment context,” Howard says. “With the growth of AI and other techniques to collect data, it will be interesting to see how this area evolves.”
Kæraa Rasmussen would also like to see the PRI increase its focus on asset managers’ transparency around sustainability-related commitments.
“We see some asset managers dividing their businesses into different entities, with one entity continuing business-as-usual and the other becoming a member of the PRI,” he says. “I think that demands some attention from investor bodies as well.”
Political headwinds
When looking ahead, one of the biggest challenges facing the PRI and other investor bodies is the politicisation of the responsible investment landscape.
Much of the recent policy and regulatory focus – such as the implementation of the US Inflation Reduction Act and the plethora of new sustainability disclosure requirements globally – has been hugely positive and beneficial to sustainability-focused investors.
However, with the anti-ESG movement continuing to gain ground in the US, investor coalitions have been finding themselves under increased pressure. Just last month, US institutional investors congregated on Capitol Hill, where they were quizzed by the House Judiciary Subcommittee on the Administrative State, Regulatory Reform, and Anti-trust.
Despite legal opinion stating that investors acting in concert on climate change are not violating their fiduciary duty and are at negligible risk of anti-trust claims, political headwinds are expected to continue – and could even worsen.
“It’s very difficult currently to find a sustainable investing path that isn’t controversial somewhere in the world,” says Urwin. “It’s important to remember that bodies like the PRI have a responsibility to the investment industry – not to the political forces or the business models of investors.”
Against this backdrop, failing to acknowledge that political pressure has increasingly become a factor for the PRI’s work in some markets would be short-sighted, Atkin argues.
“None of our work requires investors to act in a way that breaches any relevant laws or regulations governing their activity,” he says.
ESG-related risks are real and won’t go away – so trying to stop investors from managing them is not in their best interests.
“It’s regrettable that this work has become politicised, but we know there’s still huge appetite out there for what we do,” Atkin adds. “We’ve heard that clearly from our signatories – and we’re resolved to continue to deliver on their behalf.”
Many who are familiar with the PRI’s work agree that it has undeniably carved out a place for itself and its members on the international stage.
The COEPB’s Matthew represents the PRI on the UN Secretary-General’s panel on critical minerals, for example. He says he is the “sole voice” from the finance sector on the panel.
“The PRI should be engaging more in these spaces and [serve as] a conduit for members,” Matthews says. “I see potential for this to be enhanced within UN processes I am engaged in – such as the UN Environment Assembly.”
The role of investor networks and bodies in the responsible investment landscape should also be made very clear, he adds. “[This] requires sophisticated political understanding within the PRI board as to the nature of that landscape, and of how the PRI intersects with it on behalf of members.”
Half of signatories who responded to the consultation said the PRI should take a more active role in policy engagement.
Sovereign wealth fund Norges Bank Investment Management (NBIM), for instance, suggested that the organisation’s policy work could be more impactful if it reflected widely held signatory views on key responsible investment topic areas – such as stewardship and corporate governance.
Should the PRI choose to take on a more enhanced role internationally, it’s imperative that the organisation champions the asset owner voice, Matthews says. “There needs to be a much stronger focus on enabling and empowering asset owners as a primary voice in the market to identify priorities and approaches to the systemic risks they face in the world they are investing into, and their members are going to retire into.”
According to Atkin, part of the PRI’s future efforts will involve working closely with standard-setters across governments, regulators and others to deliver more effective engagement and shape responsible investment policies in the future.
“An organisation is only as good as its members,” says Matthews. “It’s up to the members to shape the organisation.”
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