Prince Charles’ charity calls for a responsible investment standard and mandatory ESG disclosures

Wide-ranging joint report by A4S and Aviva calls for kitemark

A responsible investment standard, akin to “an energy rating or fairtrade standard”, is one of many measures recommended by Prince Charles’ Accounting for Sustainability Project (A4S) and Aviva in a wide-ranging report that addresses each part of the investment chain.

The 94-page report covers discussions held in July under Chatham House rules during the Finance Leaders’ Summit held at St. James’s Palace, in which Prince Charles convened 60 global players from the investment ecosystem – from asset owners, asset managers to regulators – as previously reported by RI.

The responsible investment standard, “auditable and voluntary”, is a recommendation for asset managers. “We believe there is a need to go further to develop a kitemark in responsible investment,” the report states.

The standard would require asset managers to disclose: “How they integrate sustainability into their investment decisions, how they monitor firms’ sustainability performance, how they exercise their voting rights and how they engage with companies in their portfolio.”

The report calls on policy makers to give financial regulators, such as central banks, “a clear and explicit mandate to incorporate relevant sustainability issues into their preservation of financial stability.”

It also recommends financial regulators to move “towards mandating disclosure of climate and sustainability risk data – if regulated firms do not disclose adequately”.

The lack of global and comparable ESG reporting standards (which results in poor quality information) is it frequently described as a barrier in the report.

It is warned that the current reporting model, framed by IFRS, national standards and stock exchange rules, hampers “environment and social factors to be taken into account systematically in reporting and decision making”.

Asset owners, who “sit at the top of the investment chain” are considered to “have levers to influence sustainability outcomes”.

As such they are encouraged to make consideration of ESG risks an explicit part of the investment mandate and the asset manager selection process.It is also suggested that they “tie remuneration of asset managers to the effectiveness of their engagement on ESG”.

The recommendation aims at addressing the frustration of asset owners over the lack of transparency and accountability with regard to the stewardship activities of asset managers, who are also advised to disclose proxy votes publicly.

The report illustrates the frustration of asset owners and references an article published by RI, in which Hiro Mizuno, the CIO of Japan’s Government Pension Investment Fund, told this publication that asset managers would receive “smaller cheques” if they didn’t perform on corporate governance.

Clarification of asset owners’ fiduciary duties, which include addressing ESG issues, is a priority to dispel misconception such as “ESG is politically motivated or is only ever going to affect performance negatively”.

The report seems to consider divestment an option when it recommends asset owners to “monitor the voting activities of managers, building levers into the mandate, for example, divestment if performance does not improve following engagement.”

When analyzing the interaction of asset owners with other players of the investment chain the report observes a “catch-22” situation.

“Investment consultants (and asset managers) may not proactively propose a sustainable investment approach if they have not been explicitly asked to do so by the asset owner, while asset owners may not have the knowledge or confidence to ask what options exist.”

This catch-22 situation is exacerbated, the report stated, by “investment consultants who do not feel confident in raising sustainability matters if they do not have depth of experience, even where they have colleagues who do.”

The report also calls for the endorsement of the TCFD recommendations at all the levels: asset owners, asset managers, investment consultants, banks, credit rating agencies, stock exchanges, securities regulators, companies and financial regulators.