17 Jan 2014
In recent years a growing aversion to instances of environmental and societal disregard have given rise to responsible action on the part of corporates and consumers alike. Put another way, changing attitudes have seen the masses embrace responsible investment like never before, with environmental, social and governance (ESG) issues topping agendas across the board. Having said that, the ideals of philanthropy and social investment are yet to break from the peripheries of business and are too often neglected in place of a better bottom line.
Although responsible investment is seldom associated with profit-making, recent studies have suggested that this may well cease to be the case provided that authorities can establish a framework under which responsible funds can be assessed and the profits better understood.
A KPMG report highlights the changing fortunes of responsible investing (RI), stating that, although the shortfalls of ESG integration, distribution and transparency remain, numerous funds are turning a profit. The sector is still underdeveloped, but the European market for RI has expanded considerably from €199.9bn in 2010 to €237.9bn at the close of 2012.
In a very general sense, the six principles ensure that those abiding by the formula incorporate ESG into their culture to detract from the self-serving tendencies of investment and instead benefit the wider community in whatever way they can
A framework for change
For the RI market to migrate to the mainstream, structural and cultural changes are required of those participating. This begins with a better understanding of what constitutes RI and how these causes can be turned to profit.
Put simply, investors are calling for a concise and comparable reporting system under which non-financial information can be understood. It is this same willingness that has paved the way for initiatives such as the Principles for Responsible Investment (PRI). Founded in 2006, the initiative’s goal is to put across the implications of sustainability and ensure that signatories incorporate ESG issues in all they do. The PRI consist of six principles, which each aid investors in aligning their intentions with broader ESG-based issues.
In a very general sense, the six principles ensure that those abiding by the formula incorporate ESG into their culture to detract from the self-serving tendencies of investment and instead benefit the wider community in whatever way they can.
By recognising early on that there exists a willingness among investors to facilitate numerous non-financial and responsible causes, the UN-backed PRI initiative has become the preferred global framework under which investors disclose ESG issues. Testament to this fact is that PRI has seen its assets under management and signatories skyrocket year-on-year, with recent analysis indicating that signatories have grown from 100 to 1188 and assets from $6.5trn to $34trn in the period spanning April 2006 to April 2013.
- We will incorporate ESG issues into investment analysis and decision-making processes
- We will be active owners and incorporate ESG issues into our ownership policies and practices
- We will seek appropriate disclosure on ESG issues by the entities in which we invest
- We will promote acceptance and implementation of the principles within the investment industry
- We will work together to enhance our effectiveness in implementing the principles
- We will each report on our activities and progress towards implementing the principles
“The PRI has become the industry standard for responsible investment, and non-signatories are conspicuous by their absence,” wrote ex-PRI Executive Director James Gifford in the initiative’s 2013 annual report. “Most importantly, we have seen clear and measurable increases in responsible investment activity within our signatories, with more and more professional RI staff being hired, more requests for proposals requiring ESG capabilities, and more collaboration among signatories. We are seeing responsible investment moving from niche to mainstream.”
Historically, annual reports have consisted almost exclusively of financial information and have paid little to no attention to external matters. However, the rise of sustainable reporting in recent years shows a willingness among investors to not only disclose non-financial information, but to unite it under a single framework so that they can be assessed alongside likeminded organisations.
The PRI’s aims are not simply excluded to facilitating the existing demand for sustainable reporting, but extend to instilling a stronger sense of responsibility across the board. “One of the PRI’s goals is to make reporting on responsible investment standard practice by institutional investors everywhere. We believe standardised responsible investment reporting is the most transparent, systematic and accountable way for them to communicate their progress,” according to Wolfgang Engshuber, Chair of the PRI Advisory Council.
For this reason, PRI’s single most important project of this past year has been the formulation of the PRI reporting framework, which, according to Managing Director Fiona Reynolds, is the “biggest consultation programme ever undertaken by the PRI”.
The new framework seeks to improve upon the transparency, accountability and comparability of responsible investment activities, requiring that PRI signatories sign off on the ways in which they’ve accorded with the six principles. Following two years of exhaustive research and development, the introduction of the PRI framework in October 2013 looks to improve upon non-financial reportage by standardising indicators across 12 individual modules and instating a uniform model.
Although the findings of the PRI framework will not be unveiled until April 2014, at which time PRI signatories will submit their first report, the very fact that so many have agreed to abide by the format is a positive sign for the future of responsible investment. Armed with a wealth of comparable data, authorities will be able to more accurately estimate the effects and returns of responsible investment like never before.