Recent PRI Announcement Suggests Greater Investor Focus on Sustainability
An announcement this week (September 5, 2016) by The United Nations supported Principles for Responsible Investment (“PRI”) suggests the organization will be holding signatories to higher standards, and we expect this will have significant follow-on implications for how investors engage with public companies on environmental, social and governance (“ESG”) matters. Among the announcements made at their annual meeting, the PRI stated that it will start a process to de-list signatories if they do not demonstrate progress in implementing the Principles. The PRI also indicated that they are shifting their focus more to “outcomes and impacts” of the responsible investment processes rather than focusing on the process itself.
What is the PRI and why is it influential?
The PRI is a prominent global initiative that encourages active consideration of ESG matters in the investment process. The PRI has grown to represent over 1,500 global signatories with $60+ trillion in assets. These signatories include over 200 asset managers in the US such as BlackRock, Capital Group, Vanguard and State Street, many of which are your largest shareholders. The PRI commands an influential voice in the market on account of the commitment signatories make to core responsible investment principles like active engagement and voting, and the associated reporting requirements.
The influence of the PRI continues to grow as asset owners, such as pension and sovereign wealth funds, use the PRI reporting framework as a means to select and measure asset managers on their active consideration of ESG matters. In short, global asset managers have found PRI participation to be a critical element of successfully securing asset management mandates – a powerful economic incentive.
What are the near-term impacts of more stringent standards for PRI signatories?
The threat of de-listing has real consequences for asset managers. Their clients have come to expect this type of reporting on their asset managers’ responsible investment processes and active ownership efforts. Indeed, many client mandates are increasingly contingent on such reporting, and may explicitly require that the manager be a PRI signatory. To mitigate the risk of potential de-listing, we anticipate asset managers will likely increase their engagement with companies on sustainability matters and potentially take a more forward-leaning approach to voting on environmental and social proposals. This will take the form of both broadened engagement by investors with established ESG teams, as well as the initiation of ESG engagement efforts by investors who have yet to systematically engage on these issues.
From a substantive perspective, the PRI’s shifting focus to “outcomes and impacts” of responsible investment will likely lead to:
- Greater investor focus on industry and company-specific sustainability matters during engagement meetings as a means to increase their active engagement on these topics
- Increasing support for certain environmental and social shareholder proposals
- More formalization of investors’ responsible investment processes to ensure infrastructure is in place to support more active engagement on ESG matters
- Accelerated resourcing of ESG experts on governance teams to raise the sophistication of their practices and ESG knowledge
Companies can start preparing now for this increased focus on sustainability practices
Investor expectations for how companies approach and oversee ESG matters, particularly those that are deemed financially material to sustainable performance, will become more sophisticated. We are also likely to see greater willingness by investors to hold companies accountable for appropriately disclosing and addressing ESG-related risks and opportunities. Companies must prepare for increasingly pointed conversations with this investor audience by understanding the key areas of investor focus, their applicability to the specific characteristics of the company and its industry, and taking the appropriate steps to develop metrics and messaging. In addition, it will be important to align sustainability practices with company strategy and discuss how these practices support long-term value creation for shareholders.
If you have any questions on the PRI, this recent announcement, the potential implications for your company, or would like to discuss the trends we are seeing, we would be happy to set up a time for you to speak with members of CamberView’s Sustainability Team.
CamberView Sustainability Team