What is the PRI?
The UN’s Principles for Responsible Investment (PRI) is an international organization designed to promote sustainability in investing through the integration of environmental, social, and governance (ESG) factors in the investment decision-making process. The PRI supports its members by developing a deep understanding of the implications of ESG on investments and by helping them to incorporate this knowledge into their investment decisions.
Now representing over $120 trillion in assets under management, the PRI aims to align the capital of its members with key sustainability milestones such as net zero emissions and enable real-world action through delivering the UN’s Sustainable Development Goals (SDG). They aim to achieve this by ensuring all of their signatories are committed to meeting their six principles of sustainable investment.
PRI Signatories
Since its launch by former UN Secretary-General Kofi Annan in 2006, the PRI has grown to include a network of 5090 signatories, all with the shared goal of promoting responsible investing in line with ESG principles. Signing the PRI agreement enables companies to validate their commitment to sustainable investing and have access to tools, guidance, and collaboration opportunities.
Six Principles of Responsible Investing
The Principles for Responsible Investment were developed by an international group of investors and are supported by the UN. For investors to be a signatory of the PRI, they must recognize that ESG issues can affect the performance of their investment funds, that applying responsible investment strategies will contribute to a sustainable society, and that to align with those responsibilities, they must commit to the following six principles:
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
- Principle 6: We will each report on our activities and progress toward implementing the Principles.
Through these principles, the PRI aims to achieve a sustainable global financial system. They believe that the adoption of these principles will be necessary for investors to create long-term sustainable returns and that these principles will contribute to the responsible use of the environment and society.
Why is the PRI Important?
The PRI’s role is to ensure investors are guided and supported by the six principles of responsible investing. As the global authority on the movement of capital, investors have a huge role to play in shifting the global financial system to a sustainable economy. Investors now recognize that ESG issues such as climate change are material to their risk and return, there is greater market demand for more transparency in how and where investments are made, and there is increased regulation for ESG disclosures.
As part of being a member of the PRI, it is compulsory to report on their responsible investment activities. Reporting responsible investing means that investors can be held accountable, can improve processes of ESG data collection and aggregation, receive feedback to improve their ESG performance, and maintain transparency to stakeholders. PRI also developed minimum requirements each signatory must meet two years after signing, which include:
- A responsible investing policy for all ESG issues for 50% of their AUM.
- Meet an oversight requirement, where senior-level oversight and accountability in responsible investment implementation (senior-level includes c-suite and board members).
- Have internal or external staff members implement the organization's responsible investment policy, by collecting ESG data, engaging with stakeholders, and creating strategies for responsible investments.
If a signatory doesn’t meet these requirements, they are given two years to rectify, with support from PRI, before being delisted from the group.
Investors’ financed emissions are responsible for at least 3% of global emissions. However, that number is likely to be much higher due to underreporting. In light of this, PRI sees climate change as the highest priority ESG impact for investors, aiming to protect their signatories from the risks and expose them to the opportunities of climate change. As part of this, they require them to disclose certain climate indicators. The climate indicators that UN PRI signatories are expected to report on are aligned with those in the Task Force on Climate-related Financial Disclosures (TCFD). However, they are not as in-depth as the TCFD’s requirements, and reporting can be more descriptive.
The PRI is important because it ensures investors are meeting the minimum requirements of responsible investing, holding them accountable with transparent reporting, and providing support and guidance for them to improve their ESG performance.
Benefits of Being a PRI Signatory
Signing on to the PRI offers numerous benefits, such as:
- Access to a Network of Like-Minded Investors: Signatories can collaborate and share best practices with a global network of institutional investors committed to responsible investment.
- Tools and Resources: The PRI provides various resources, including research, reports, and case studies to help investors implement the principles.
- Enhanced Reputation: Commitment to the PRI signals to stakeholders that the investor is serious about incorporating ESG factors and promoting sustainability.
- Better Risk Management: Integrating ESG factors helps identify and mitigate risks that may not be evident through traditional financial analysis.
Challenges of Implementing PRI
Despite its benefits, implementing the PRI comes with challenges:
- Implementation Complexity: Effectively integrating ESG factors into investment decisions requires significant effort and resources. This process can be complex, especially for large organizations with diverse portfolios.
- Data Quality and Availability: Reliable and consistent ESG data can be hard to obtain, making it difficult to accurately assess and compare companies’ ESG performance.
- Balancing Short-Term and Long-Term Goals: Investors may struggle to balance the need for short-term financial performance with long-term ESG objectives. This balancing act requires careful strategy and commitment.
Does PRI Membership Align with Better Fund Performance?
To be a signatory to the PRI, an annual fee ranges from $500 - $15,000, depending on an organization's AUM and jurisdiction. However, that is a negligible amount for most investment companies. Membership in the PRI demonstrates a public commitment to ESG factors and transparency, which has been shown to increase fund flow by an average of 4.9%.
The ability to display an improved ESG performance through signing up to ESG investor alliances like the PRI, Glasgow Financial Alliance for Net Zero (GFANZ), and the Net Zero Asset Owners Alliance (NZAOA) has been correlated with better fund performance. This shows investors have more confidence in the long-term financial performance of ESG funds.
PRI research has also shown that signatories have, on average, a better ESG score than non-signatories (~6% higher score). However, these higher scores come from better scores in the social and governance criteria. The report found that PRI signatories had no significantly better environmental footprint than non-signatories.
Is The PRI Membership Used to Greenwash?
Although research showed that the level of fund flow for a signatory of the PRI can increase and that the social and governance score can improve, reports have also revealed that signatories' ESG scores were not affected. In fact, in some cases, PRI signatories were less likely to adopt ESG measures in their proxy voting, as PRI signatories were 30% more likely to be silent on environmental issues.
Other research found that US-domiciled signatories to the PRI have similar, at best, and, in many cases, worse ESG performance than non-signatories, and that their increased fund flow as a result of becoming a PRI member is unaffected by poor ESG performance. To combat this, the PRI established a method to avoid greenwashing by providing investor guidance and support to improve practices over time, reform the reporting framework, and continue to evolve the minimum requirements for signatories in its strategic plan for 2021-24.
Conclusion
The UN’s Principles for Responsible Investment provide a comprehensive framework for investors aiming to incorporate sustainability into their investment strategies. By adhering to these principles, investors can enhance long-term returns, better manage risks, and contribute to a more sustainable global economy. As members of the PRI continue to attempt to meet their principles and guidance, it will be essential to walk the talk and back up their signature with effective reporting and delivery of responsible investing.
