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Responsible investment is ‘an inevitable movement in society’



The Principles for Responsible Investment (PRI) is a United Nations-backed initiative that seeks to engage investors on environmental, social and governance (ESG) issues. Its executive director, James Gifford, speaks with Blue & Green Tomorrow.

This piece originally featured in Blue & Green Tomorrow’s Guide to Sustainable Investment 2013.

What are the main changes you’ve witnessed within the responsible investment industry in the past year?

There’s been significantly more interest in responsible investment in hedge funds. And I guess the overarching thing is a continued broadening of responsible investment into other asset classes. That’s the top level trend which has been very strong over the last year. The other area worth commenting on is ESG integration, or factoring ESG issues into mainstream, fundamental analysis – bottom-up stock picking.

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I think what we’re seeing is two forces, which are changing that in a very positive way. The first one is that there’s just a lot more ESG research that is just higher quality, and more fund managers are starting to use it.

There’s now a recognition that these issues are more material than ever; it’s not just that they’re important – they’ve always been important for companies – it’s that there’s a recognition that the world is changing faster than it has ever changed before. So the rate of change is increasing.

Many of the most important changes are loosely within the ESG bucket, so change is opportunity. When you’re talking about investment, change equals opportunity, because when things are changing, some people will be faster and some people will be slower to understand and in effect trade on those changes. And ESG issues, being some of the largest, most important megatrends happening in society, simply translate into opportunities for the cutting-edge of investors to outperform their peers.

The other big strand supporting ESG integration is the academic research. The proliferation of really interesting academic research around demonstrating that these issues are material is very persuasive, and we simply didn’t have this level of persuasiveness in academic research 10 years ago.

What are the main drivers for this growth in responsible investment?

I think there are three drivers. There’s a reputational driver, which we’ve seen with some of the weapons manufacturers being divested at the moment in the US. And there are financial elements to that, certainly, as well.

Then there’s the investment belief. These are no longer niche, irrelevant issues. They are actually issues that are discussed by boards of companies, at the very highest levels. And yet, many investors are still waking up to this fact; that management of ESG issues, sustainability issues and anti-corruption programmes – these are core to the corporations they own, so why would they not be core to the owners of those corporations?

The third driver, which is a big one, is client pressure from the asset owners, in particular pension funds, on their fund managers. The easy way to put it is society is heading in that direction anyway. Corporations, regulators and consumers are caring more about these issues, so investors can’t pretend these issues aren’t relevant. They are part of that ecosystem, and as that ecosystem takes these issues into account in much more systematic and deep ways, so too will investors inevitably.

Do you think the PRI’s work has led to significant behavioural change within corporations?

There are obviously a lot of drivers and it’s impossible to pin it down to the PRI alone – a certain proportion would have happened anyway, because this is one of those inevitable movements in an industry – but I think we have been able to make that faster, because we’ve engaged with hundreds and hundreds of signatories, or investors in institutions, who were never engaged with responsible investment before.

We have signed up hundreds and hundreds of investors who are very much mainstream investors, and many of them have really moved ahead in responsible investment. There may have been another catalyst, but what we can say is that we certainly are a catalyst for many hundreds of signatories.

Next year, we’re moving to a mandatory transparency framework for reporting to the public, which means that over 1,000 signatories will be reporting significant amounts of responsible investment information to the public for the first time. That’s really quite dramatic, and they’ll be delisted from the PRI if they don’t want to participate in that process. So the PRI is really driving transparency within this industry in a way that wouldn’t have happened without us.

In terms of the underlying corporations, we certainly have some good evidence that our work has resulted in improvements in corporate activity, but the easy ones to determine are things like disclosure – are the corporations disclosing more than they were before investors asked them to disclose?

But what’s more important than focusing on those very difficult-to-answer questions is are the investors changing their behaviour and are they doing the type of things that we would expect, over time, to result in improvements in corporate behaviour? And to that, I think we can answer a very clear yes.

What are the main trends going forward and what will be the PRI’s main focuses?

Responsible investment, active ownership and ESG integration don’t really help if the system is collapsing. So reflecting on the financial crisis, we are now looking at how investors can collectively work to try to address some of the more systemic problems. So rather than focusing on the investor-company interaction, what’s not working in the system overall?

How do we go about making ethical, sustainable and responsible investment mainstream?

I think there are dozens of examples that show how unethical behaviour can lead to dramatic financial losses; you can look at the fines being imposed on a number of banks right now for Libor or money laundering; you can look at News Corporation and ethical issues around phone hacking.

Combining those, academic evidence that being a good company can result in outperformance, plus obvious examples of where poor corporate responsibility leads to scandals and high risk behaviour, we just continue to make that case.

This is an inevitable movement in society; it’s not just an investment movement, it’s a corporate and societal movement. With each new generation, there is more recognition that these issues are important and responsible investment is simply the investor part of an inevitable movement, which is basically created by having thousands of these conversations to demonstrate why it’s important. We need to demonstrate the business case.

Further reading:

Encouraging sustainable finance: the Principles for Responsible Investment

The principles for responsible investment: a round-up

PRI signatories pick out top ESG engagement issues

The Guide to Sustainable Investment 2013