Saturday 19th April 2014                 Change text size:

The principles of responsible investment – a short series. An introduction.



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Six years ago the United Nations established the Principles of Responsible Investment for asset managers and asset owners globally. In this holiday series, Simon Leadbetter explores the six principles and what they mean.

Nobel Peace Prize winner Kofi Annan was the United Nations Secretary General between 1997 and 2006. In 2005, he invited the world’s largest investors to develop a small set of principles for responsible investment. Twenty institutional investors from 12 countries agreed to participate and the rest, as they say, is history. Not quite. That was only the beginning of UNPRI, which was formally launched at the NYSE in April 2006. These principles helped inform the thinking behind Blue & Green Tomorrow and the role of investment in shaping our future.

There are six principles of responsible investment and in just under eighty words, they cover investment analysis, ownership, disclosure, promotion, collaboration and reporting. Not a bad outcome for the competing aims of twenty major investors and 70 stakeholders from the industry, intergovernmental, government, civil society and academia. This series will look at each principle in turn.

It is striking that these clear principles were drafted in 2005 and 2006, well before the crash of 2007 onwards, and even more telling that the rate of institutional sign-up increased after the crash.

Principles are a very good place to start in any human endeavour. Philosophically speaking a first principle is a proposition that cannot be deduced from any other proposition or assumption. Socrates, Aristotle, Euclid and Descartes all have far wiser things to say about first principles but to codify easily understood and commonly accepted principles means asking some very searching and fundamental questions about the underlying essence of something.

Many of us have principles we would adhere to; that it is wrong to harm or kill others, that we should protect the vulnerable, that certain human freedoms are sacrosanct. However, Groucho Marx eloquently describes the human condition of highly flexible principles, “Those are my principles, and if you don’t like them… well, I have others.”

Taking the first assumption, that most of us would agree that it is wrong to harm or kill others. ‘Thou shalt not kill’ is a fairly explicit Judeo-Christian commandment after all and doesn’t have a convenient ‘unless’ or ‘except’ get out clause.  It is easy to see how quickly that principle is lost in so many areas of human activity.  The obvious one is war, but theologians and philosophers will tie themselves in knots to defend the concept of a ‘just war’. Similarly, the death penalty.  But every day, through a million small acts of commission or omission innocent people are harmed or killed by another’s action or inaction.

Setting this out as a syllogism, “It is irresponsible and immoral to cause harm to children. Corporation A causes harm to children. Corporation A is irresponsible and immoral.” The first principle is that it is irresponsible and immoral to cause harm to children. We know that Corporation A harms children, therefore we can deduce that Corporation A is irresponsible and immoral. The question then becomes what responsibility do you bear if you invest in Corporation A, knowing what it does to children? Can you absolved of responsibility if you invest in a fund, or a fund that invests in funds, that invests in Corporation A? Does not knowing what Corporation A does to children, the ignorance or three wise monkey defence, absolve you of all or any responsibility?

Otto von Bismarck said that, “When a man says he approves of something in principle, it means he hasn’t the slightest intention of putting it into practice.“ It is apparent that many people would agree with the principle, or in principle agree with the assertion, that it is wrong to harm or kill others. However, they will happily abandon that principle if it involves war, certain legal jurisdictions that have the death penalty and maximising the profit on their investment portfolio.

The six principles of responsible investment are aspirational and voluntary guidelines that focus on the triple bottom line elements of environmental, social and governance issues (ESG) – colloquially known as planet, people and profit (PPP). Aspirational and voluntary should and would worry most hardened sustainable investors but it is only through such aspirational and voluntary frameworks that international organisations can effectively operate across conflicting national and corporate interests.

Our final thought on principles goes to Dwight D. Eisenhower and his inaugural address. In one elegant sentence, he summarises the value of our principles, “A people that values its privileges above its principles soon loses both.”

This is the statement of principles:

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:

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.

Tomorrow we will look at the opening clause of the principles.

Further reading

Encouraging sustainable finance: the principles for responsible investment

What are you investing in and who are you investing for?

The Guide to Sustainable Investment 2012


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