When the Principles for Responsible Investment (PRI) was launched at the end of April 2006, the financial world looked very different from how it does today.

As James Gifford, the network’s founding executive director, notes, the “ethical” or “socially responsible” investment industry was a tiny, retail-oriented sector that did only negative screening or exclusions of so-called “unethical” sectors, along with a modest amount of shareholder activism in the US.

“Sustainability issues were not seen as material, and incorporation of these issues into investment processes was seen as likely to result in financial underperformance, and a breach of fiduciary duty,” he tells Responsible Investor.

Gifford – who left the PRI in 2013 and is now Credit Suisse’s head of sustainable and impact advisory – says US institutions were particularly hesitant about joining the network in the early days as they felt that it was “not sufficiently focused on material ESG issues”.

Fifteen years later, ESG has moved from niche to mainstream. “It has become a topic no one in finance can neglect,” says KLP’S vice-president for corporate responsibility, Heidi Finskas. “It has also gone from a voluntary endeavour to being regulated by law, especially in Europe.”

‘A changing world’

Overall, the verdict on the PRI to date from within the investment industry has been resoundingly positive. The initiative is credited with playing a crucial role in the development of sustainable investing, as well as the reframing of ESG issues as potentially material and aligned with fiduciary duty.

At the same time, the sector is currently taking a bit of a battering. In the US, a wave of Republican treasurers and attorneys general are targeting financial institutions over the use of what they deem to fall under ESG.

Meanwhile, regulators on both sides of the Atlantic are increasingly clamping down on alleged greenwashing. Last week the Securities and Exchange Commission fined Goldman Sachs Asset Management for failing to follow its policies and procedures on ESG investments between April 2017 and February 2020. And back in May, police in Germany raided the offices of DWS and Deutsche Bank in connection with greenwashing allegations against the asset manager.

In response to this changing environment, the PRI in September announced the launch of a wide-ranging consultation to explore issues around “the future of responsible investment”, the PRI’s “vision, mission and purpose”, and the value it provides to signatories.

Dubbed “PRI in a Changing World”, the initiative has been divided into two stages: signatory conversations (September to December) and an online formal consultation survey (open November to January).

In the coming days, the PRI will be sending a survey to signatories to kick off the second phase of the consultation.

Over the past month, RI has also spoken to multiple signatories and relevant stakeholders on the future of the PRI. Perhaps unsurprisingly, many of the issues raised align with initial findings by the initiative.

Bigger or better?

A topic that came up in nearly every conversation was the size of the network.

At launch, the PRI had 63 signatories. Today, the number has risen to 5,179, covering asset owners, asset managers and service providers with total assets under management of $121 trillion.

Respondents are happy to acknowledge that the PRI’s “big tent” approach has been instrumental in growing its signatory base and consequently mainstreaming ESG – however, many note there have been unintended consequences.

A senior European responsible investment officer says that, due to the initiative’s size, it is “really difficult” to distinguish investors who want to bring about genuine change from those who know that in order to score extra points on an external assessment by an asset owner they need to be a PRI signatory.

“Size matters when you want to be influential, but I think that the shift of influence to the silent, somewhat inactive majority has made the PRI more political and less action-minded,” the investor says. “I get the conundrum, but for an organisation of this magnitude and potential influence they need to revise their mission, and perhaps even composition, to see how they can provide the contribution to bring sustainable investment to the next level.”

Echoing this, a US-based investor suggests that the size of the organisation generates a “gravitational pull” to the lowest common denominator. “In this case the pull is towards minimal integration of ESG factors with a focus on impacts to the portfolio company, and that can lead to greenwashing.”

One market player also notes that, as a membership organisation, the PRI can only move as fast as members are willing. “That may not be fast enough, given the scale of action required by investors to tackle climate change and deepening social inequality.”

For an investor, the network needs to be comfortable no longer growing its signatory base.

“They need to move from ‘big tent’ growth to change,” they say. “Perhaps the PRI needs to think about whether the principles themselves need an update to put real world sustainability impact at the heart of what PRI does (and its signatories sign up for).”

Recognising difference

In a webinar exploring the results of the consultation so far last week, Nathan Fabian, PRI’s chief responsible officer, acknowledged that the signatory base has grown and become more diverse – and that this means that signatories have different levels of experience, investment approaches, and local regulatory and operational contexts.

There were heavy hints that the PRI is seriously considering how to manage such a large membership base in order to ensure that it supports investors’ specific needs. Suggestions mooted include segmentation and/or co-developing with signatories a framework on progression that enables them to opt into areas that describe objectives and actions that are relevant to their organisation.

A couple of investors discussed with RI the possibility of using the PRI’s annual reporting requirements – set to return next year after a two-year hiatus – as a vehicle to differentiate between signatories.

The European responsible investment officer suggests that the PRI could publish signatories’ scores or rank them.

Another asset manager argues that the reporting requirements could take a more regional approach. “They would still have common foundations and common requirements, but certain requirements could be different depending on the geography of where the signatory is based. This can help continue to raise the bar in a way that appreciates regional specificities.”

Relevant reporting

Unsurprisingly, the PRI’s annual reporting and wider assessment process came up in many conversations with signatories.

For KLP’s Finskas, it is critical that the process is developed in a way that is useful for signatories but also “considers the significant workload” involved in meeting multiple reporting requirements.

“It is also important that the PRI, to the extent possible, seeks to align definitions and standards with other reporting frameworks and requirements,” she says.

Others also question the focus of the PRI’s current reporting framework. “I believe the assessments should be less burdensome but more relevant,” says the European responsible investment officer. “At the moment, to some extent the assessments can be doctored to have all the right words and mention a million engagements but be meaningless.”

On a more positive note, Anne-Maree O’Connor, head of sustainable investment at NZ Super Fund, says the annual assessment has been good at keeping people on track.

She agrees, however, that the assessment process “could do with a rethink”, and suggests that this could be done in the context of other standards required by regulation or codes. “If signatories are getting external assurance that what they’re doing is in line with the PRI principles and good practice then that could that streamline the assessment.”

Asset owner focus

Governance is also emerging as a key topic for the PRI and its signatories.

As a US-based investor puts it: “Given the urgency of the situation, whether we’re talking about climate change, biodiversity loss or the rise of anti-democratic political parties, there is an increasing need for the PRI to be an organisation that pushes its members to aggressively address these topics.”

He suggests the PRI could do this by leveraging the fact that seven of its 10 elected board members are from asset owners.

“You have enormous asset managers in the PRI talking out of both sides of their mouth in response to pressure from anti-ESG politicians on the one hand and ESG-integrating asset owners on the other – and the asset owners need to do more to call these asset managers out,” he says. “The PRI is in a good position to be the vehicle to help and support asset owners to be enforcers, turning the screws and making more rigorous demands of asset managers.”

He warns that failure to do so could threaten the credibility of the organisation. “Currently, the fact that these globally important asset managers continue to be members of the PRI while playing both sides is insane and creates real risks for the legitimacy of the PRI.”

During last week’s webinar, however, Fabian noted that most of the investment managers and service providers that PRI has engaged so far in its review would like to see “more representation of non-asset owner signatories on the PRI board”.

Active ownership

For Gifford, one of the biggest achievements of the PRI to date has been its centring of active ownership as a key tool for responsible investors.

“Before the PRI, only the most activist US SRI funds were doing shareholder activism, with a small amount of shareholder engagement happening in a few other markets,” he says. “Principle two of the PRI put the obligation to be active owners front and centre in the exercise of fiduciary duty, and catalysed a tremendous amount of pressure from shareholders on listed companies to improve their sustainability performance.”

Early on, the PRI launched the “PRI Engagement Clearinghouse” – later renamed the “Collaboration Platform” – which acts as a forum for PRI signatories to “collaborate, pool resources, share information and enhance their influence”.

According to the initiative’s 2022 report, in 2021/22 the platform averaged 3,500 monthly users, a 31 percent increase year-on-year.

Some investors are unimpressed, however. One tells RI that the platform is more a “sign-up place where participation and commitment is mixed”.

They are suggesting that the PRI create a platform where investors can be totally honest and transparent about their individual engagements, what their objectives are, and who does what.

“Of course, this would take a coalition of willing, but through it we could get more of an understanding of what we’re all engaging on, reach out to each other, and give advice or get involved in some way. And it would stop us being investor number 240 asking a company the same question.”

When it comes to collaborative engagement, however, the consensus is that the PRI’s involvement as secretariat and organiser is instrumental.

In particular, the network’s Advance initiative has been generating considerable interest among investors. Launched last December, the project aims to maximise investor contributions towards business respect for human rights and investor efforts to address social challenges. In May, it named the first 40 companies to be targeted for engagement.

Policy puzzle

The PRI is aware of investor appetite for it to get more involved in policy. The upcoming survey will ask signatories if they would support the organisation playing an “even more” active policy role.

Some investors acknowledge, however, that this might be hard given the range of regions members originate from, and potentially conflicting views on sustainability and levels of ambition.

In its first 15 or so years, the PRI has provided guidance and worked on a range of ESG topics. However, as one investor explains: “To ensure they continue to have impact, be innovative and seen as relevant they need to find a way to identify those topics where to prioritise work.”

On what additional areas the network could focus on in its second phase, Gifford says it needs to find ways to help large pension funds mobilise capital into private market impact strategies.

He admits, however, that this will be much harder than integrating ESG issues into existing investment processes in listed equities and bond. “It involves real money going into entirely different things, new teams of people, new investment policies and strategies and the development of different investment capabilities – none of which is easy for a large, established institutional investor,” he says.

Affiliate publication New Private Markets recently explored how the PRI can be relevant to private equity.

Interestingly, one investors said market players need to think less “what can PRI do for us” and more “what can we do for PRI”.

“The quality of PRI’s work is a direct function of the quality of our contribution as investors. Perhaps five years ago, when sustainability teams were one or two people, that wasn’t the case,” he says. “But today, when even mid-size fund managers have 20 people plus working on sustainability, there’s a lot of expertise outside PRI.

“PRI is not a low-cost service provider, but a change organisation. How can we give space to PRI to work on change? For all the attention to sustainability, markets are not sustainable. PRI can undertake actions that commercial organisations may not be able to do so, and we need to support PRI to do that.”

Look out for our interview with PRI CEO David Atkins on Tuesday. That will be the second part in our PRI series, to mark the return of PRI in Person in Barcelona this week.