The PRI and the responsible investment community has much to achieve this year

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Responsible Resolutions: This is the latest article in a series from sustainable finance practitioners about their hopes for the New Year.

In a year which saw many highs and lows relating to responsible investment, some themes for 2020s became increasingly visible in 2019. Climate change moved into the streets and found a new voice in Greta Thunberg, reflecting frustration amongst the younger generations that decisive climate action remains out of reach.  

Difficult questions are also being directed at the existing primacy of shareholder value and the expectation that corporations will embrace a wider civil and social responsibility in their business models. ‘Do no harm’ is emerging from being a feel good factor to business with purpose which may well end up as the new corporate operating principle. 

On both these broad points of action, there is less patience for inaction and less room for obfuscation on climate. Accountability is also harder to duck, with higher expectations of behaviour and increased scrutiny the norm. Responsible investment and the global financial sector as a whole have a share of the responsibility to push for action and increase accountability. 

At the PRI, we will continue our commitment to leading the way on two key issues (there are others) where action and accountability is called for in the 2020s:  Climate change and human rights.

Australia has become the latest (but not the only) example of a climate impacted future. During my current holidays in New South Wales, wreathed in smoke, I watched as every night, the grim statistics were inexorably outlined in local TV news bulletins.

To date, the fires have claimed the lives of 28 people, destroyed nearly 2,000 homes, killed a billion animals and burnt 15 million acres of land. While Australia burned, its largest near neighbour, Indonesia, suffered double the loss of life, enduring mass evacuations and property destruction from record heavy rainfall. Increased severity of weather events is just one of many climate impacts beginning to appear.  Climate action in the 2020s will increasingly be measured by the level of investment in mitigation, adaptation and resilience. Australia and Indonesia are but the most recent harbingers of what’s to come. 

To quote UK Prime Minister Boris Johnson: “We must end the dither and delay.” For the PRI’s part, we will continue to focus our climate work on policy interventions stemming from our Inevitable Policy Response (IPR) programme and investor action through initiatives such as the Investor Agenda, Climate Action 100+ and solidifying the recommendations of the TCFD internationally in corporate transparency and disclosure regimes.  The PRI work will also focus on the wider impacts of climate change – water, deforestation, plastics and a Just Transition. 

Perhaps the most exciting programme for the new decade is the UN Asset Owner Alliance (AOA), which the PRI has convened with UNEPFI.  Asset owners aren’t just asking companies to commit to a Paris-aligned world, they are committing to action—to transition their entire portfolios to Net Zero by 2050 with metrics, targets and regular reporting to hold themselves accountable—thereby demonstrating real leadership.  And they will be accountable not only to their own beneficiaries, stakeholders and industry peers but to the finance sector as a whole and most importantly, wider civil society.   

The responsibility rests squarely with institutional investors to act on the financial nexus that fuels negative corporate climate lobbying.  

Civil society is also seeking increased accountability around the actions of corporate climate deniers and the powerful business lobby groups they fund, always seeking to impede progress on climate. The responsibility rests squarely with institutional investors to act on the financial nexus that fuels negative corporate climate lobbying.   

With the COP, the global climate negotiations, being held in the UK this year and nations due to submit new and more ambitious NDCs, investors must send a strong message to governments that we expect results in Glasgow. If the next COP is not successful, then as an industry, we will have failed to truly exert the latent influence that we have. Last year’s COP in Madrid was a disappointment; we simply cannot afford in 2020 for policymakers to become paralysed on climate action. 

Beginning a decade of action on human rights

Accountability on human rights cannot be avoided in this decade. At present, more than 40 million people find themselves subject to some form of modern slavery or human trafficking. 

That’s 1 in 185 people – more people are in slavery today than at any time in our history, an unacceptable human tragedy.  To meet SDG Target 8.7 to eradicate slavery and trafficking means we need to remove 10,000 people per day from this modern form of human bondage. To put that task into context, Brazil has been the most successful country in tackling modern slavery, removing 50,000 people over the past 20 years.  

Scrutiny is growing on both corporations and investors. ’Do no harm’ takes on a whole new meaning when it’s applied to supply chains and underlying investments.  The investment community has the leverage to investigate supply chains and to be more proactive when it comes to issues of human capital.  

The investment community has the leverage to investigate supply chains and to be more proactive when it comes to issues of human capital.  

For our part, the PRI is working with the UK’s Churches, Charities and Local Authorities (CCLA) Association on Find it, Fix it, Prevent it, to take forward the Finance Against Slavery and Trafficking (FAST) principles and also building a new human rights programme.  Additionally, we will be rolling out a new programme of work to integrate the SDGs into the investment process and help investors move from focusing on process to impact. 

Slavery and human trafficking on a mass scale was overcome once. The new decade will see policymakers, corporations and investors increasingly accountable for confronting and overcoming it again.

2020 will also see us implement our Stewardship 2.0 programme – aiming to move stewardship from box ticking and compliance to outcomes.  Stewardship  that is collaborative, focused and centred on the major systemic issues we face.  It’s only by investing in companies with purpose, underpinned by good governance, that responsible investment will reach the next level.  Good stewardship is also about investors getting involved and being part of the solution – as in the case of the work being undertaken to build a new standard for the storage of tailing facilities with the mining industry, due to be released this year.

In 2020, we will welcome our 3000th signatory and are about to welcome our 500th asset owner. This marks a milestone; given that asset owners sit on top of the financial chain, it is imperative that they commit to sustainability in their funds and in the advice that they receive from investment managers.

But despite this success, we are very aware that in the past, some investors have joined the PRI with little conviction behind their signatures, a point which was made recently by Jean-Marc Jancovici, a partner at Carbone4.

This year, following the end of our current reporting cycle, we will, for the first time, delist signatories who do not meet our minimum requirements.  We think this will signal that becoming a PRI Signatory is not a box ticking exercise but requires real commitment to the integration of the Six Principles.  

As many readers of this and other publications will know, in 2018, we analysed signatories’ progress on ESG integration. Over the last two years, we have worked collaboratively with a small group of signatories to help strengthen their efforts. In 2020, we will not shy away from the task of removing those whose performance has not improved.  And this is not the end of the story on accountability.  The PRI will regularly review the minimum requirements so that we are confident they are fit for purpose, now and into the future.

In 2019, in another accountability measure, we began a consultation on our Reporting Framework.  Our view was that outputs could be improved, and we also wanted to ensure that the Framework remains relevant to evolving responsible investment practices and is useful for signatories and the responsible investment community as a whole. 

In future, only the very best practices on ESG will receive top marks from the PRI.  As the requirements become more stringent, we hope this will push our signatories to go ’above and beyond’ on ESG integration.  We will continue to deliver tools and guidance on ESG integration, with new work on passive investment to be delivered this year.

We must also act in areas where accountability is threatened. In the US, the largest financial market in the world, the SEC has proposed rules that stand in direct contradiction to its stated purpose, to protect investors. Ultimately, they would concentrate power into the hands of CEOs and corporate boards, weaken shareholder protection, especially for smaller investors and diminish basic transparency, scrutiny and corporate accountability. 

The proposals are, in effect, a form of corporate voter suppression to disenfranchise investors who seek to actively engage with companies on ESG matters, climate risks, sustainability and long-term value creation.

To date, over 100 signatories have signed the PRI's letter to the SEC, opposing these changes. There is an opportunity to do so through the collaboration platform until the 31st January. If ever there was a time for investors to get active, surely it has to be now.

For our signatories, no matter where you are in the world, adding your financial weight to ensuring that 2020 becomes a watershed year for responsible investment and the beginning of a decade of action and accountability is vital.

The PRI is often the subject of discussion and debate, and that’s as it should be. Being measured on actions and accountability is to be expected.

The coming decade is one where the scrutiny will be higher, and the expectations sharper across the board for the financial sector and those who support responsible investment.

We can lead or follow. 

Fiona Reynolds is CEO of the Principles for Responsible Investment