The Danish bombshell may not be the last revolt PRI has to deal with

Anger amongst Nordic signatories demands a serious response strategy by the UN-supported investor group.

Today’s announcement by six important Danish signatories to leave the UN-supported Principles for Responsible Investment is a bombshell. The PRI was not informed in advance of the decision. Ironically – and worryingly – the Danish exodus is likely to gather more (bad) press coverage than much of the vital work the PRI has been doing since it launched in 2006. It is not, however, unexpected. RI warned in October that the PRI faced a revolt from Nordic investor signatories who said it was not doing enough to clear up what they said were problems with its governance structure and public policy strategy. In private, some said that unless the PRI addressed their concerns they were considering leaving. That six have now done so – a nuclear option that few truly expected to happen – is a public relations disaster. ATP’s explanation for its decision – reported by RI – is nothing short of damning: a rare step up in tone from an asset owner.
And the anger is not exclusive to the Danes. Other large and influential Nordic asset owners have been seriously considering withdrawal. What has held some back is political pressure from their respective governments who do not want to be seen leaving a United Nations-linked sustainable investment organisation. This revolt could have been much worse. It is not likely to be the last action from the Nordic region. RI understands that other Scandinavian signatories are considering filing a form of signatory shareholder resolution in advance of next year’s PRI Annual General Meeting for a vote on the organisation’s governance structure, which they say was amended without proper signatory consent. The resolution method encapsulates much of the Nordic ire. This is the kind of governance problem that they regularly challenge as shareholders at investee companies: why should the PRI be any different? If anything, as signatories, they say it leaves them at risk of accusations of hypocrisy if they don’t demand the samegovernance standards of a member organisation they belong to. RI understands that the PRI has recently been in high-level, related contact with Danish pension schemes and was keen to head off the problem. PRI Managing Director, Fiona Reynolds, has diarised a trip to Denmark in mid January 2014 for face-to-face talks. It’s hard not to empathise with Reynolds who has walked into a fire-fight caused by sparks that go back several years before she joined the PRI in February this year. Indeed, the propellant for the latest flare-up can be traced to the PRI’s annual conference in Rio in 2012 where RI reported initial concerns on asset owner governance influence over the PRI. But so far the PRI’s diplomacy has not impressed the Nordic investors; many say that despite several meetings in the last two years it is not doing enough to meet their demands for a transparent, accountable structure. Others are keen to engage further and let the new PRI management settle in. And the Nordics’ view is not one held by other influential PRI signatories, some of whom say privately that they believe the Nordic funds are over-reacting to a governance hierarchy that was put in place to attempt to safeguard asset owner influence after signatory asset managers, often paying significant membership fees, had sought more input into PRI strategy. The divergence in views is undoubtedly part of the problem.
Other sources close to the PRI say the Nordics have a point. They point out that the governance structure is complicated and was originally put in place based on legal advice procured at the time of its switch to become a UK registered company – the PRI Association – prior to switching to a mandatory fees system in 2011.
The Nordic bombshell leaves the door open to reconciliation, but it is relatively ‘hardball’ in suggesting that only after a governance overhaul will the six Danish funds consider whether to rejoin. All six maintain their commitment to responsible investment in or out of the

PRI, and say they will continue to respect the six principles. One major change that Nordic investors have proposed is for the PRI Association Board (PRIAB), the body responsible for oversight and direction of the PRI Secretariat, to be directly elected by all signatories. Currently, signatories elect members of the PRI Association Council (PRIAC), which meets twice a year to decide the PRI’s overall strategy and policies. The PRIAB is appointed by a majority of PRIAC asset owner members following recommendation from a nominations committee. PRIAB meets in person three to four times per year and by teleconference a further four times. The Nordic investors say the nominations process enables council members (PRIAC) to promote and then vote for themselves as a board member (PRIAB), which they say falls short of good governance. More broadly, the Nordic investors want far more democratic signatory oversight of PRI financial decisions, which they say are taken internally without wider consent. A threshold of 10% backing from other investors required to lodge a non-binding resolution to a signatory AGM vote is at odds with good international corporate governance practice and should be amended. A number of Nordic signatories are also upset that approaches a few years back to the organisation to have a regional PRI co-ordinator were rebuffed when the PRI said they should finance it themselves. It’s no coincidence that the growth of domestic SIF organisations has been significant in the last few years across the region. This decision by the Danes to leave PRI is a major body blow and the first real test of the organisation’s resilience. It is a decision that will not have been taken lightly, particularly given theDanish government’s past support for the PRI, both financially (the Danish government has been a significant backer of internal PRI projects) and on the regulatory level. RI reported in June 2012 that the Danish government had been one of the first to develop ethical guidelines for institutional investment in sovereign bonds. Furthermore, it was the promotion of CSR guidelines that prodded many Danish pension funds to sign up to the PRI. Nordic investors are amongst the most committed PRI signatories and their backlash will be keenly felt. Disturbingly, RI also hears well-sourced talk that signatories in other regions such as Latin America are grumbling about what they see as a European investors club with little outreach in countries like Brazil. These are dangerous times for an organisation like PRI, which needs to consolidate its huge success by focusing on what unites its investor members, and by making sure that its governance is acceptable to as many of those as possible. An organisation like PRI can quickly lose legitimacy if weakened from within. The word ‘private’ crops up five times in ATP’s critique of PRI, a suggestion that it has effectively become a closed club for certain members. That may or may not be true, but perception is critical. In-fighting is the last thing that supporters of responsible investment need just as its influence on finance is growing and will hopefully develop further with the forthcoming PRI reporting and assessment framework. The six Danish departees are serious investors, not asset owners throwing a tantrum. The response by the PRI, perhaps with support from representatives at the United Nations, which has much at stake here, needs to be commensurate.