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Participating in a conversation on Environmental, Social and Governance (ESG) factors is now a necessary part of investment. Investors recognise that responsible investment helps them to better manage risks and deliver better outcomes for their clients and beneficiaries. Policy makers are also starting to recognise that ESG issues can support – or undermine – public policy objectives. The PRI’s annual conference, which starts today (Sept 25th) in Berlin is taking place against a backdrop of regulatory interest and policy making in the area of responsible investment.
To date, the PRI has identified over 300 regulations or soft law initiatives that encourage or require responsible investment across the world’s 50 largest economies, half of which were introduced since 2013. This underscores how much responsible investment policy is growing.
Some of these regulations are brand new, ESG-related regulations. But a lot of them are revisions; policy makers are adding in ESG clauses to existing capital market or corporate regulation to strengthen governance, risk management and transparency.
Almost all the regulation we identify falls into three categories. We shouldn’t view these as a ‘tick list’ – but these are the ideas that seem to be catching on.
Firstly, we’re seeing regulation aimed at pension funds – usually taking the form of disclosure requirements around ESG issues through the statement of investment principles.
Secondly, we’re seeing a growth in stewardship codes – these govern the way investors engage with investee companies.
Finally, we’re seeing many corporate disclosure regulations. These are an enabler for responsible investment – you need quality information to feed into investment analysis. Some regulation, like the French energy transition law, traverses all three categories.But, what we find is, that while investors perceive some regulation as impactful, there is a lot of ESG related regulation that investors don’t see as having much of an impact for the following reasons:
1. Policy design: often, the reasons for including ESG in regulation are unclear, and are almost always not measured.
2. ESG issues are often treated as voluntary, or conflated with ethical issues. Or to put it another way – regulation doesn’t treat them as financially material. And all too often, responsible investment regulation isn’t aligned with wider policy frameworks.
And so, to better understand what’s working and what’s not, the PRI is forming a new expert group of policy professionals. This expert network will allow the PRI and its signatories to exchange information on policy and regulation in real time, including policy processes, such as regulatory consultations, hearings and implementation. We are targeting a group of up to 80 signatory participants in order to ensure a global group of asset owners, asset managers and service providers.
Members will share their own insight, which will provide input, advice and feedback to PRI’s policy processes, and that of other signatories. The purpose of the group is to ensure PRI’s and our signatories’ policy engagement is current and international, and to promote best practice among national regulators.
The PRI’s mission statement calls for signatories to play a role in supporting a sustainable financial system by addressing obstacles “that lie within market practices, structures and regulation”. Since its launch in 2006, the PRI has worked alongside thousands of investment professionals. But to date, the PRI has had relatively little engagement with policy and regulatory affairs professionals. This is about to change.
In short, this group will amplify global efforts to achieve a policy and regulatory environment that supports or requires responsible investment. We hope you will join us.
Fiona Reynolds is managing director, Principles for Responsible Investment (PRI).
The PRI is particularly encouraging senior policy and regulatory affairs professionals to apply. Please send a one paragraph biography to: email@example.com by Friday 27 October.