PRI Finds Increased Commitment to Responsible Investment
Interest in private markets swells as divergence between asset owners and managers continues.
An assessment of investors’ approaches to responsible investment (RI) has revealed that asset owners and managers are increasingly focused on driving sustainability outcomes via their investment decision-making.
The UN-convened Principles for Responsible Investment (PRI) has published the findings of the third edition of its annual survey of its signatories, noting that the majority (65%) said they are making investment decisions targeting sustainability outcomes.
“Signatories largely showed that they embed all their [sustainability] decisions in financial materiality,” Toby Belsom, the PRI’s Director of Guidance, told ESG Investor.
The majority (44%) of the 65% said that sustainability outcomes are financially material, 30% said they want to prepare for and respond to legal and regulatory developments, and 20% said they want to protect their reputation.
An additional 14% said they are being asked by their clients and/or beneficiaries to focus on sustainability outcomes.
Over half of both asset owners and managers (57% and 56% respectively) said they use the UN Sustainable Development Goal (SDG) framework to identify sustainability outcomes. Meanwhile, 31% and 27% utilise the UN Guiding Principles, and 29% and 24% use the EU Taxonomy.
“Investor signatories can take action on sustainability outcomes through the allocation of capital and/or stewardship,” the report said. “When it comes to capital allocation, 7% of PRI signatories are investing in publicly traded green, social or other types of thematic bonds to achieve sustainability outcomes.”
South Africa-based Government Employees Pension Fund (GEPF) said its approach to developmental or impact investing is to invest for a return that also provides positive outcomes through job creation, addressing inequality, providing energy security, and mitigating and adapting to the impacts of climate change.
“This approach is part of the GEPF’s long-term thinking on responsible investment and forms part of our strategy and investment beliefs,” the GEPF said.
Meanwhile, Japanese asset owner Sumitomo Life Insurance aims to invest JPY 700 billion (US$4.6 billion) between 2023 and 2025 in ESG-themed investments which contribute to the SDGs – JPY 400 billion of this is reserved for climate solutions.
Last year, the PRI developed a guide in collaboration with the Generation Foundation and UN Environment Programme Finance Initiative to help asset owners and managers intentionally generate a positive impact through their investment activities.
According to the guide, the four steps to sustainable impact are: determining intreention, setting real-world sustainability goals, acting through a combination of tools, and measuring progress.
The PRI survey is based on information provided by over 3,000 signatories across 88 countries with a collective US$89.3 trillion in reported AUM.
Divergence
However, while 45% of asset owners said they use the Paris Agreement as a framework to identify sustainability outcomes, just 25% of asset managers could say the same.
“There is a reasonably significant difference between the approach that might be taken by an asset owner compared to their investment managers,” said Belsom.
“This is unsurprising as they are driven by very different ways of making decisions. Asset managers are beholden to their client base, whereas asset owners are more able to make their own decisions and chart their own direction.”
As such, asset owners are likely to be more ambitious in their involvement in something like a collaborative engagement on climate risks or alignment with the Paris Agreement, he said.
In addition, the survey found that 58% of asset owners are aiming to take a longer-term approach to identifying climate-related risks and opportunities and use climate scenario analysis, compared to 29% of asset managers.
Nonetheless, asset owners’ selection of asset managers based on their RI priorities nonetheless “continues to mature”, said the PRI.
The vast majority (93%) said they evaluate their investment managers’ incorporation of material ESG factors in the investment process as part of manager monitoring for actively managed listed equity assets, while 84% evaluate RI policies and guidelines on proxy voting as part of their management selection – up from 74% in 2023.
However, the number of asset owners including clauses relating to responsible investment in contractual agreements with investment managers fell to 81% in 2024, down from 86% the previous year.
Growing in popularity
Both asset owners and managers are increasingly turning to private markets to realise their sustainability-related investment goals.
Signatories are increasing their RI allocations to private markets, the survey said, with a growing number of private markets investors incorporating RI commitments within limited partnership (LP) agreements.
The data also showed widespread stewardship activities being undertaken by LPs and general partners (GPs) in private markets, with common steps including implementing 100-day plans, introducing roadmaps and using benchmarks.
“There is increasing innovation in private markets,” said Belsom. “From big private equity (PE) players launching new energy transition-focused funds, to incorporating RI commitments within their limited partner (LP) agreements.”
A 2024 report published by LGT Capital Partners found that 73% of the more than 300 assessed PE fund managers have robust ESG processes in place, a jump of 46% from 27% in 2014. In the past year alone, 33 PE managers significantly improved their ESG efforts, which resulted in a higher rating for their firm.
The PRI is currently exploring the rise of sustainability-focused value creation in the PE space, Belsom said. The body has found that they are introducing active steps to promote sustainability, including 100-day plans, assigning responsibility of responsible practices to specific individuals, and measuring and setting sustainability-related targets.
The body has previously highlighted the “natural fit” between stewardship and private equity, noting that GPs reported experiencing significant benefits from effective stewardship, including enhanced client relationships and a positive impact on company earnings. GPs also said that strong ESG stewardship capabilities had helped them with deal flow or closing competitive deals.
“This survey is one of the biggest temperature checks of the responsible investment industry,” said Belsom.
“The investment industry is now experiencing a period of rapid change – although this data has largely been collected before the last three months, I would hope that overall performance next year continues in the right direction, even if signatories have to talk about sustainability in a slightly different way.”
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