Six years after its launch, the UN Principles for Responsible Investment is suffering from growing pains.
How it deals with them will determine whether it takes its place as the standard for responsible investing or dwindles into just another compliance issue for investors. The stakes could hardly be higher.
The initiative is clearly growing – new signatories sign up almost daily: indeed it has attracted almost 50 new ones since July. The asset base now stands in excess of $30trn, although that will include some double-counting.
But beyond the raw numbers, the PRI has without a doubt been instrumental in hauling responsible investment to the centre of the debate about how assets are managed. That’s a tremendous achievement in its own right.
Nevertheless, the PRI is entering a new stage of its development, with mandatory fees for signatories giving it a £3.2m income in the year to March 2012. It is no longer an upstart but an established feature on the investment landscape.
It’s against this background that it has emerged that the planned tightening of its reporting framework won’t go ahead quite as planned, after complaints it was too difficult. Now it seems the PRI will go back to the drawing board and “improve and streamline” the process and widen the assessment period as well.
The whole thrust of the PRI up to this point has been to create a ‘broad church’, on the understanding that standards will be tightened along the way – thus improving the level of responsible investment across the board.
If this central plank is weakened too much the PRI risks undermining its entire purpose. Even if the reporting framework is only slightly eased it still reflects a perception that asset managers are increasingly in the driving seat at the PRI.
The fear is that a once-in-a-lifetime opportunity to really hold the global buyside to account will have been squandered.Arguing the case for ‘leniency’, Ole Buhl, the head of ESG at Danish pension ATP – and chairman of Dansif – has gone on record saying the PRI should be wary of demanding too much of smaller fund managers. It’s a fair point, though he also points to the risk of the PRI becoming a compliance tool.
Some will say the reporting framework was always intended to be too onerous, so it could be eased as a negotiating tactic and still create a more rigorous test. Perhaps, but the PRI will have to guard against seeming to accommodate managers too much.
A delegate at RI’s recent ESG Europe conference asked during one of the panel sessions whether the PRI could be used as a guarantee for responsible investment quality. The panelists agreed that it shouldn’t be, and the questioner was left a bit perplexed. If it can’t fulfill this role, it’s reasonable to ask what role does it play?
Meanwhile, quietly, some seriously large asset owners have formed their own grouping – the Long-Term Investors Club now has 15 major institutional members. If not a rival to the PRI, it nonetheless represents an alternative focus for institutions.
In response to broader concerns about its own internal governance, the PRI recently disclosed more detail about its internal committees and quietly revealed that Executive Director James Gifford has stepped down from the Board. With its increasingly important status within finance, it is right that it should be more open.
The departure of founding PRI chairman Donald MacDonald at the end of 2010 meant the loss of an articulate asset owner voice at the top of the organisation, and it seems – from the outside at least – that some of the ‘heart and soul’ has been lost.
One of the reasons the PRI offers for becoming a signatory is “reputational benefits.” Let’s hope any reputational damage to all concerned is strictly limited.