The PRI’s drive to bring sustainability to capital markets

21 May 2019

An interview with Fiona Reynolds, CEO of Principles for Responsible Investment (PRI), about progress towards a sustainable global financial system and the priorities for asset managers in realising that journey.

  • Encouraging a long-term view in a short-sighted world
  • Active engagement with companies is underway but needs to be stepped up
  • Collective action by asset managers can bring effective leverage

 

In 2005, the then United Nations Secretary-General Kofi Annan invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment (PRI).

The PRI’s philosophy is 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.

To achieve this, the PRI works by encouraging the adoption of the Principles and collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation. The PRI now has more than 2 000 signatories across 50 countries.

Here, Fiona Reynolds, Managing Director of the PRI and responsible to the board for its global operations, talks exclusively to The Intelligence Report about progress to date and the challenges that remain.

 

Fiona, can you tell us about the role finance and asset management has to play in the construction of a sustainable world?

Yes, the PRI was created to bring sustainability to capital markets. The Principles were launched in April 2006 at the New York Stock Exchange. Since then, the number of signatories has grown from 100 to over 2 300 managing assets totalling USD 83 trillion.

We have come a long way but there is much more to be done. It’s not easy to take a long-term view in a short-term world where quarterly results and shareholder primacy can dominate the decision-making process.

Progress so far is neither at the scale nor the pace required. The turning point will be when we don’t have to talk about responsible investment but just investment … and can move beyond the mindset of making profit at any cost.

We are on the right track. A growing number of investors understand that ‘planet’ and ‘profit’ must be aligned. Fiduciary duty is being redefined for the 21st century. In the past some institutional investors may have believed that environmental, social and governance (ESG) issues were irrelevant to portfolio value, and were therefore not consistent with their fiduciary duties. This assumption is no longer supported.

Decisions made by fiduciaries cascade down the investment chain, affecting decision-making processes, ownership practices and, ultimately, the way in which companies are managed. Investors now realise that the companies they invest in need a strong licence to operate.

Active engagement is underway, be it on social issues or tax policies, inequality and CEO remuneration or gender rights. Strong steps have also been taken on climate action so everything is moving in the right direction. We need to up the pace over the next 12 years because we are still a long way from a sustainable financial system.

 

What do you see as the current trends and activity among asset managers with regard to sustainable investing?

There are clear signs of acceleration with a number of fantastic leaders among asset managers that includes BNP Paribas Asset Management, particularly on the environmental side.

At the end of the day, sustainable investments are a commercial imperative. It simply is not possible today to exist as an asset manager in the institutional asset management arena if you cannot demonstrate how you integrate ESG issues into your investment process.

The United Nations Sustainable Development Goals (SDG) are the roadmap to achieve a better and more sustainable future. With 169 targets, they provide a comprehensive blueprint for all the issues that matter. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice.

We should bear in mind that the SDGs require USD 3.5 trillion of additional investment per annum, out of a global GDP of approximately USD 115 trillion. This should be manageable, especially given what achieving the SDGs would mean for unleashing human and economic potential and ensuring planetary safety.

It’s no longer enough just to talk about ESG or be a signatory of the PRI. Monitoring of asset managers’ actions with regards to sustainability issues is improving all the time.

There is evidence of these trends in what we hear from business leaders. At company AGMs, there are detailed questions about sustainability.

 

And by pulling together, the asset management industry is stronger?

Collective action is essential to achieve leverage and make ourselves heard. All PRI engagements are collaborative, so as to benefit from the amplification of assets under management.

Let’s take the example of Climate Action 100+, the investor initiative we launched in 2017 to ensure the world’s largest corporate greenhouse gas emitters take the actions necessary on climate change. It’s the biggest ever investor engagement, with 300 investors managing assets of USD 32 trillion.

This level of commitment has led to investors owning 10% of all BP shares putting their names to a Climate 100+ resolution requiring BP to provide a detailed strategy on how it will comply with the Paris agreement. This is reckoned to be the strongest level of support ever achieved for a climate-related resolution at a major public limited company.

Shell has also set out the initial steps it will take in delivering commitments on climate change in a joint statement with investors participating in Climate 100+ initiative. And Glencore has  announced it will limit coal production to reduce carbon emissions.

So, investors are bringing about change in a way they haven’t in the past. Isolated action is ineffective. Asset managers also need to work with governments and regulators to help develop regulation that creates a framework for sustainable investments.