The Principles for Responsible Investment (PRI) has unveiled its new Reporting Framework. This is the culmination of over two years work by the PRI and its signatories.
It has involved a high level signatory committee working to develop the overall framework, as well as a series of specialist committees developing new modules for specific asset classes. The PRI has held two consultations on its design and a large-scale pilot reporting exercise last year. Following signatory feedback, some important modifications and enhancements have been made.
The revision of the framework had several goals. One key goal for many signatories is to use the information reported as a basis to evaluate their own progress and learn from their peers. When a signatory wants to understand current practice on, say, company engagement or manager appointment, the new framework will provide a very strong evidence base, showing what signatories in different parts of the world are doing. It will contain both easily comparable quantitative information and qualitative descriptions giving richer detail. The PRI will be providing a data query tool to enable signatories to easily benefit from this learning outcome.
Another objective is to enable asset owner signatories to more easily gauge the progress asset managers have been making in implementing the PRI – both their current managers, and those they are considering for appointment. Demand from clients is a key driver of asset manager interest in the PRI. In the past, some asset managers have been tempted to tick the PRI membership box and feel their job is done. By providing clients with a much richer and more comparable basis for manager evaluation, these client signals could be greatly strengthened as clients review the progress their managers are making.The new framework is designed to facilitate this kind of client evaluation because it is divided into a series of specialist asset class modules. Clients will be able to straightforwardly compare their equity managers against each other, for example, without being distracted by information about their real estate activity.
The new framework is by no means just for investment manager reporting. Asset owners are also required to report. One important development is the new reporting module for asset owners who appoint external managers. This will cover both pension funds and other kinds of asset owner such as fund-of-fund managers. The new module will require transparency from asset owners about the extent to which they take account of ESG factors in manager appointment; the reporting they require; and the monitoring they do. Much of this information will be available both to fund managers and to their own beneficiaries and customers. The public status of this reporting may encourage a new burst of activity in this area.
Another useful feature of the new framework is that it will allow the production of automated reports for signatories to use on their own websites. All the hard work that signatories put into the process of reporting will now generate a useful document that can be used to communicate performance directly to clients and other stakeholders.
A final and very important objective of the exercise is to improve public accountability. The credibility of the PRI initiative depends on securing public trust in the good intentions and concrete progress that is being made by the investment community towards a more sustainable financial system. There is a degree of healthy scepticism about the extent of the commitment of investment institutions to take the steps necessary to truly address the challenges of sustainability and poor corporate governance. This scepticism is not always unjustified.
The new framework takes a major step forward from the old approach, by making it mandatory for signatories to report publicly on their progress in implementing the principles across a wide range of reporting indicators. This transparency will allow beneficiaries, retail customers and the wider public to make their own judgements about the extent of signatory progress with the principles.
The process of developing the framework has not always been straightforward. There is a tension between demanding the really detailed information that is required to make accurate objective evaluations of performance, and the need to make the reporting burden manageable for signatories.
After listening to feedback, the PRI has taken a number of steps to reduce the burden of reporting, while retaining key indicators. Most signatories will now only be required to complete the part of the framework that relates to their main asset classes – rather than providing an exhaustive account of every activity. While about 50% of the framework’s indicators will be mandatory to report, a substantial proportion of the more burdensome indicators are now voluntary or have been simplified or removed. The new framework will certainly be time consuming the first time round, but we think it strikes a better balance.
We are under no illusions that the new framework is a complete and permanent solution to reporting investor performance on ESG issues. The PRI is not even 10 years old; good practice on integration, engagement and other areas is still immature; the science of measuring its quality is in its infancy. So, while there will be a period of stability in the framework, there will in due course, need to be further revisions in the coming years.
One particular challenge relates to ‘outcomes’. The new framework will more easily allow comparisons of policies and processes, but the PRI is only in the early stages of collecting information about how signatories measure the outcomes of those policies and processes, both in terms of investment performance and impact on sustainability. This mirrors similar problems in corporate sustainability reporting and is reflective of the nascent level of understanding in the responsible investment industry today about how best to do this.More progress needs to be made, but the new framework does lay the foundation for future work on this front. Each asset class module contains a dedicated section asking signatories for information about the outputs and outcomes of their activities, and these indicators make up between 10-15% of the overall framework.
For example, the module covering voting and engagement in listed equities goes beyond asking signatories to simply disclose the number of engagements they have carried out during the year, and asks for estimates of how many of the companies that were engaged committed to implementing the actions discussed during the engagement. While the majority of these new indicators are voluntary to report and disclose, collecting this information will over time help the industry reach a consensus on how best to measure outcomes in a standardised and systematic way.
Another major challenge for the future will be how to grapple with the new strategic agenda that the PRI announced last year in Rio. Many of the world’s most significant ESG problems – short-termism, financial regulation, environmental externalities – are systemic issues that require collective solutions. These are new areas of focus for the PRI and any future revamp of the framework will need to find a way to capture what signatories are doing in these areas.
As co-chairs of the signatory committee responsible for advising the PRI on the design of the new framework – one asset owner, one asset manager – we feel confident that the new framework is a major step forward. We believe it will provide a substantial and valuable resource for both signatories and their stakeholders, and help accelerate progress in responsible investment.
Craig Mackenzie is Head of Sustainability at Scottish Widows Investment Partnership
Anna Hyrske is Head of Responsible Investments at Ilmarinen.