Given the host of issues facing the planet, its inhabitants, and the interconnected global economy today, no country, company, or individual can act myopically.
To help hold the financial community accountable in the face of these realities, the United Nations introduced the Principles for Responsible Investment (PRI) in April 2006. Consisting of six core tenets, the PRI program to date has attracted more than 2,300 asset owners, investment managers, and service providers as signatories, publicly pledging to adhere to the Principles in their processes and practices.
Joining the ranks of PRI signatories represents a commitment to investing responsibly with transparency and accountability. Here’s a closer look at what’s involved.
ESG Considerations at the Core
The PRI evolved from the realization that environmental, social, and governance (ESG) issues underpin a more holistic investment mindset than one based solely on financial performance. In 2005, then–United Nations secretary-general Kofi Annan pulled together representatives from more than 20 pension funds, foundations, and government funds to craft the Principles, which were later unveiled at the New York Stock Exchange.
The Principles are backed by a series of recommended actions related to investment decisions, engaged ownership, transparency, collaboration, and the integration of ESG considerations across the world’s financial markets.
“These Principles grew out of the understanding that while finance fuels the global economy, investment decision-making does not sufficiently reflect environmental, social, and corporate governance considerations—or put another way, the tenets of sustainable development,” Annan said in the 2006 introduction of the Principles.
Today, the initiative is managed by the independent PRI Association, which includes representatives from the UN Environment Programme Finance Initiative and the UN Global Compact on its board of directors. Through programming, reporting, and support for PRI signatories, the PRI Association strives to achieve the PRI’s mission: “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.”
The Six Pillars of the PRI
To help advance the PRI mission, each signatory must strive to fulfill each of the six Principles for Responsible Investment in its regular business practices.
Some of the pillars fall into the category of ESG investing best practices. For example, Principle 1 commits signatories to performing ESG analysis, while 2 and 3 entail pursuing active ownership and “seek[ing] appropriate disclosure on ESG issues,” respectively.
Other pillars are concerned with the Principles themselves and their place in the wider sustainable investing community. Principle 4 speaks to “promot[ing] acceptance and implementation of the Principles,” and 5 prompts signatories to collaborate in achieving them. As part of that collaboration, Principle 6 asks signatories to “report on our activities and progress.”
Although the Principles are voluntary and aspirational—the PRI Association acknowledges that they are a work in progress for most firms—each signatory must submit an annual transparency report for publication. The yearly review of its responsible investment activity holds each firm publicly accountable and can even provide a way to track progress and consider the effectiveness of its programs relative to other signatories.
A Broad Spectrum of PRI Signatories
All told, 70% of PRI signatories are classified as investment managers, 18% as asset owners, and 12% as service providers. While serving different stakeholders, each sees the value and importance of weaving ESG considerations into day-to-day operations.
For example, the City of Chicago—identified as an asset owner—became a signatory in September 2018. “This step is part of our larger work to integrate . . . ESG factors into our investment decisions,” then–Chicago city treasurer Kurt Summers said of the commitment. “The City of Chicago is ready to lead the charge in new and innovative investment strategies for a sustainable future.”
Weeks later, service provider Fitch Group, the global credit ratings company, also joined the PRI ranks. “Global taxonomy surrounding ESG is starting to emerge and we view the UN PRI initiative as a key forum for refining and developing the dialogue between investors and service providers,” said Andrew Steel, global head of sustainable finance at Fitch Group. “Fitch supports the PRI statement on ESG in credit ratings, and is fully committed to providing investors with the necessary insight and information to make informed decisions.”
According to the PRI, in 2018, the number of signatories rose 21% from the previous year. Other recent signatories include the National Grid UK Pension Scheme, the Employees’ Retirement System of the State of Hawaii, and insurer Swiss Life.
An Important Step for Impact Investors
In and of itself, a pledge to responsible investing objectives won’t be the key to improving ESG awareness, adherence, or performance. Actually delivering on such a promise is a must.
But by sharpening the focus on six common goals and holding signatories publicly accountable, the PRI initiative is elevating the strength of ESG efforts across the entire financial sector.