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Fiona Reynolds: The Principles for Responsible Investment looks to new challenges ahead

PRI Managing Director on the governance changes at the initiative

The PRI has seen a lot of changes in the last 18 months. We have now grown to an organization with over 1,350 signatories representing US$45 trillion assets under management (AUM). We also have an extremely varied signatory base, ranging from highly sophisticated groups who have a long track record in using ESG in the investment decision making process to smaller groups for whom this is a relatively new focus.

As with any large organisation, sometimes growth happens too quickly and the governance structure is unable to keep pace with member needs.

As most people know, in 2013, things came to a head when several of our Danish signatories raised a number of issues with which they were unhappy.

One of the issues of greatest concern was the PRI’s two-tiered governance structure. While signatories voted for the Advisory Council, they were unable to vote for the make-up of the smaller board, and that made them uncomfortable.

Rather than see the situation with the Danish signatories as a purely negative development, we listened to their feedback and used it as an opportunity to re-examine our governance structure in order to see what we could do better.

After due deliberation, the PRI Advisory Council agreed to carry out a formal review of the PRI’s governance. This included extensive signatory consultation, which would then pave the way for a simpler, more transparent and accountable governance structure. We also appointed Carnstone Partners, an independent consultant, to present recommendations on a new structure for the PRI, PRI Governance Review.

At the end of January, signatories voted on the new board governance structure and revised Articles of Association for PRI Association. An overwhelming majority voted in favour of the new structure. A record 43% of asset owners voted—the highest participation rate for a signatory vote in the PRI’s history—with 124 asset owners and 303 non-asset owners (27%) casting their vote. Among asset owners, 97.6% approved the revised Articles while among non-asset owners, the approval rate was 96%.

Under the current Rules and Articles of Association of PRI Association, the changes must now be approved by the asset owner representatives of the Advisory Council.This will take place at the Advisory Council’s next meeting in New York on March 5-6, enabling the new PRI Board and governance structure to come into effect on April 1. Current Advisory Council representatives will become Directors on the new PRI Board and will serve the remainder of their original elected terms.

We feel strongly that the governance review demonstrates our commitment to be responsive to the needs and concerns of our divergent signatory base. And the hugely positive response we have received shows that signatories are pleased with the direction we are now taking, which will include delivering more opportunities for signatories to participate in governance matters.

Now that the governance review is behind us, we would like to move on and focus on the PRI’s core activity – how do you administer responsible investment and get more people actually taking steps to integrate it into their processes?

At the PRI, we encourage signatories to be active owners. We know that investors have the ability, by working individually or collaboratively with other investors, to effect change not only within their own organisations but also to influence the behaviour of companies and other entities in which they are invested through, for example, encouraging these companies and other entities to improve their management systems, performance issues and reporting on environmental, social and governance (ESG) these issues.

Given the PRI’s wide range of signatories in terms of size, geographic and experience of using ESG, we appreciate that a “one size fits all” approach will not work with our signatory base. Rather, we need to help signatories find strategies for incorporating responsible investment that work best within their own particular organisation.

This is one of the reasons why we emphasise the importance of collaborative engagement. We actively work with our signatories on a range of topics from incorporating ESG into executive pay to human rights to water risks. And we are starting to address more asset classes such as fixed income, private equity and hedge funds. At the end of last year, we published a report “The Case for Investor Engagement in Public Policy,” which made the case for how asset owners and
investment managers can be a force for change if they work together to engage policymakers.

Our engagements utilise the PRI Clearinghouse, a global platform for collaborative engagement initiatives. It provides PRI signatories with a private forum to pool resources, share information, enhance influence and engage with companies, stakeholders, policymakers and other actors in the investment value chain on environmental, social and corporate governance issues across different sectors and regions. Close to 500 PRI signatories have been involved in at least one collaborative initiative since the platform was launched at the end of 2006, and close to 600 collaborative proposals have been posted. Invitations to collaborate are posted by both asset owners and investment managers.

Some of these collaborative engagements afford the opportunity for asset owners and investment managers to work together more closely. One of the PRI’s key messages has always been that asset owners need to more closely vet the investment managers with whom they work so that responsible investment strategies move robustly across the financial services chain.Looking ahead to the coming months, PRI plans to publish data that will provide guidance on how asset owners can select investment managers that will support responsible investment strategies. We are also developing a platform that will enable signatories to share reporting and assessment data reports with one another, thereby allowing signatories to learn best practices from their peers. And we are looking forward to our annual conference in September, PRI in Person, which for the first time, will be held in London. PRI in Person provides a unique opportunity for our global signatories to meet, hear from industry, corporate and government leaders and share information with one another.

As our signatories well know, the PRI is not a passive organisation. Once signatories agree to sign up to the Principles, we expect them to try and become leaders in responsible investment and set the tone for other organisations. We look forward to continuing our work with signatories to help them find their voice in the world of responsible investment.

Fiona Reynolds is Managing Director of the Principles for Responsible Investment (PRI).