When the $14 trillion United Nations Principles for Responsible Investment (UNPRI) initiative announced earlier this month it was preparing to expel fund managers for failing to integrate its six principles for environmental, social and governance factors into investment, it clearly recalled the experience of the Global Compact, the corporate forerunner of PRI. The Compact, launched in 2000 by Kofi Annan, former UN general secretary, commits companies on ten principles ranging from upholding union rights to the abolition of child labour.
The Compact has been criticised by campaigners for inaction when companies fail to progress on commitments – to the point of sparking opposition websites attacking its shortcomings. It has since toughened its act. Earlier this month it removed 630 companies from its list of participants for failure to communicate progress. Nonetheless, during the first half of 2008, 701 new companies joined, increasing the total number of business participants to 4,619.
Anticipating any similar backlash, Donald Macdonald,chairman of the PRI, recently said it did not want to be a ‘brand image’ to signatories and that all would need to comply with its reporting and assessment framework within their second year of membership. He said the issue had come up for a “very small number of fund managers.” Speaking to Responsible Investor, Georg Kell, executive director of the Global Compact, says the comparisons are “instructive” for the future success of the PRI.
While such delistings, Kell says, are “regrettable” they are essential for protecting the integrity of the initiative. Both the Compact and the United Nations Environment Programme (UNEP) were instrumental in the creation of the PRI. Both Kell and Achim Steiner, executive director of UNEP, sit on the PRI board, contributing to what he calls a “positive, active, relationship.” Notably, all three groups combined their annual meetings last month in Seoul, South Korea, demonstrating the increasing overlap between investors and corporations in delineating a global view of responsible business and investment practices.
Another example of co-operation was the campaign launched earlier this year by PRI signatories representing $2.13 trillion in assets to lobby companies paying lip service to the Compact. Investors say they feared companies adhering positively to the Compact were becoming frustrated at others taking a “free-ride”: vaunting membership but failing to deliver on action.
Kell says the investor campaign will be not a one-off: “There are many such campaigns going on behind the scenes regarding investor engagement on the Global Compact. Similar arguments are being made on a one-to-one basis between investors and companies. We will help to facilitate them when we can.” Last month, APG Investments, the fund manager to the €250bn ($315bn) ABP pension fund in the Netherlands, said it was looking for what it called a large number of “unexploded bombs” in terms of companies failing to adhere to their commitments to the Compact, in one of the largest ever such reviews by an institutional investor. Such pressure to make both the Compact and the PRI perform better is critical, says Kell: “The Global Compact is a voluntary initiative and has pushed companies to sign up because of a commitment to its standards. The good news is that a lot of companies have understood this at a rhetorical level, but the benefits of doing it right and explaining the business case for adherence are not clear. Therefore, it makes a huge difference for us to get the investors on side with a position on the risk case of not signing and the business opportunities linked to being signatories.“The Compact hasn’t researched the causality/materiality issue itself, according to Kell, but he says recent studies show there is a link, albeit a qualified one:
“Over time, self-reporting is key, but I think at some point, a little like the Global Compact, the PRI will have to look at differentiation.”
“I take the Goldman Sachs argument that a company’s ability to be on top of ESG issues is increasingly necessary to sustain and maintain market leadership. In other words if you get your ESG engagement right it doesn’t mean you are a successful company, but if you don’t then you’ll find it difficult to sustain leadership. One example is Siemens, the German engineering company. Earlier this year, I met with executives after their problems and they are now re-evaluating their whole business approach: supply chain management, resource management, etc. Large corporations can no longer turn a blind eye to these issues.”
It took the Global Compact more than five years to introduce its Communication on Progress (COP) reporting mechanism. Kell says it is likely the PRI will more rapidly adopt a public COP reporting system, but probably not for a year or so: “I think investors still have a lot to learn on these issues because there remains a lot of short-termism in finance, although I’d like to think this is changing gradually. If you think back to the Asian
financial crisis, many investors pulled out of the region, whereas business was on the ground and stayed put. Some businesses have learnt the lesson on responsibility the hard way, and investors are sometimes behind the curve.” Kell says the key part of the Compact many people don’t understand is that signing up is an initial public statement of intent: “It’s imperfect because this is the nature of developing such initiatives. For us the issue now is how to more actively police the COP because we had a real problem with the free-rider issue. We discussed this issue for three years because some board members were against a mandatory policy, arguing that it would go against the voluntary principle of the Compact. In the end, however, the voices prevailed that argued that we needed to build the Global Compact brand and that the COP pledge was one way of achieving this. We think it’s working, but you have to be careful to not discriminate against non-English speaking companies nor put all companies in the same mould. For example, a large number of Chinese companies signed up recently and they are investing in becoming compliant, but it will take them time to reach a good standard.”Kell says the PRI has been innovative in promoting the concept of voluntary reporting: “Over time, self-reporting is key, but I think at some point, a little like the Global Compact, the PRI will have to look at differentiation. The Compact has thousands of signatories; some are very good, some in the middle, some lagging. The question that then arises is how to ensure the front-runners keep engaged and motivated. What kind of incentives do you have for investors to expedite the principles as quickly as possible? It’s similar for PRI. There are some practical ways of doing this such as representation on the PRI board or how to define specially engaged participants.” To laud companies making good progress the Global Compact holds an annual meeting where it puts forward so-called ‘champions’ to talk with the press, analysts and investors: “We also produce a ‘notables’ ranking in order to give an aspiration to other companies by those which are making good progress in line with expectations, and this year we will try and identify good practice in terms of implementation, which is always difficult because it is always contextualised with different dilemmas for different companies.”