Taking responsibility

The first report on the implementation of the Principles for Responsible Investment reveals dramatic progress in some areas – but less in others. Mark Nicholls reports

Over the past 12 months, investment managers and asset owners responsible for some $10 trillion have signed up to the UN’s Principles for Responsible Investment (PRI). And, if the first report assessing how they are implementing the six commitments is to be believed, the PRI is beginning to drive serious consideration of how environmental, social and governance (ESG) issues affect investment performance.

“Overall, we’re very pleased with the response,” says Donald MacDonald, chair of the PRI and director of the trustee board of UK telecoms giant BT’s pension scheme. “We weren’t expecting very strong results this time, but they reflect the fact that the PRI is being incorporated not just into [socially responsible investment], but into the ‘mainstream’.”

Launched in April 2006 by the UN, and at that time backed by investors managing $2 trillion, the PRI requires signatories to commit to six “voluntary and aspirational” principles.The principles are “not prescriptive, but instead provide a menu of possible actions for incorporating ESG issues into mainstream investment decision-making and ownership practices”, the PRI website says.

The PRI commissioned Mercer Investment Consulting to conduct a survey of how the principles are being implemented, based on a questionnaire, with some verification of the responses.

Jane Ambachtsheer, Mercer:“Investors are taking different approaches … but they’re definitely taking action”

“Overall, there is evidence to suggest that investors are taking different approaches [to implementation], but they’re definitely taking action,” says Jane Ambachtsheer,Toronto-based global head of responsible investment at Mercer. She adds that “we had a very good response rate”, with 62 asset owners and 44 investment managers, or 77% of those surveyed, returning the questionnaires.

The initial focus has been on the first two principles, she notes, which respectively commit signatories to incorporate ESG issues into investment analysis and decision-making and to be “active owners”, incorporating ESG issues in ownership policies.

Sixty-seven per cent of asset owners and 83% of investment managers have adopted a formal policy on responsible investment, and more than half of respondents have formally integrated ESG into investment decisions.

On active ownership, 88% of investment managers, and 82% of asset owners, are conducting “at least some” engagement on ESG issues, although the report notes that “approaches to active ownership vary according to signatories’ missions, objectives, resources and ownership philosophies.”

Progress on some of the other principles is less advanced. “The more difficult areas – the starting to integrate ESG into investment time horizons, investment mandates, incentive structures [for investment managers] – there’s not as much activity.That’s not a great surprise.

“That’s where we’d look for interesting developments over the next 12–18 months,” Ambachtsheer adds. So how is the Mercer assessment being used? Those who hoped that it could provide a useful stick to beat laggards and advance progressive investors are likely to be disappointed. Respondents to the survey are sent their own positioning in each principle, but only by quartile. While they are free to make these public, the PRI itself will not be publishing the results.

Ambachtsheer argues that they are useful to respondents “as a way of organising their activity” around the principles and learning from their peers. But this first assessment also provides a benchmark against which progress can be judged, and this report “helps to highlight areas that people will focus on”.

However, others believe the PRI should provide a more public assessment of investor progress on responsible investment. “The report next year needs to be prepared to name leaders,” says Rory Sullivan, head of investor responsibility at UK investment manager Insight Investment, suggesting that it should say who made the upper quartile. “Otherwise, pension funds can’t tell asset managers apart.”

He adds that he would like to see the selfreported data “critically evaluated”, although he praises both the Mercer report and the initiative as a whole.“But it’s too early to say if the PRI is working. Now is when the rubber hits the road in terms of implementation.”

Rob Lake, senior portfolio manager, environment, social and governance issues at Dutch pension giant ABP, agrees that it’s “early days” for the PRI, and notes that there is a huge diversity in how investors are applying the principles. But “judging it on its first year, it’s a great success ... there’s no reason to think that the momentum will ease up.”

He sees the principles as “a framework that stimulates discussion and gets people together”, and claims that “lots of discussions are going on behind the scenes”.

One area where the Mercer report acknowledges more is to be done is in implementing Principle 5 – working together to enhance implementation of the principles. Late last year, the PRI established its Engagement Clearinghouse, allowing signatories to share information on engagement with companies. The report notes that the New York City Employee Retirement System used the clearinghouse to post its intention to file a resolution at the annual general meeting of US retail behemoth Wal-Mart. As a result, other signatories became co-sponsors.

However, at the time of the Mercer survey, only 18% of asset owner and 16% of investment management respondents had used the clearinghouse. This is an area where MacDonald of BT would like to see “a step change and a far greater level of co-ordination,” he says.“This will be an exciting and large part of the PRI’s activities, where we can show we can really make a change.”