UN PRI launches “strategic and systemic” sustainable financial system review

Consultation with signatories to determine areas of focus

The UN-backed Principles for Responsible Investment (PRI) has launched a major “strategic and systemic” review looking at how it can help to remove some of the main barriers to a sustainable global financial system.

The initiative will initially consult with its 1,144 signatories to set out the priorities of the project, with suggested potential topics including both company and investor short-termism, the design of investment mandates, portfolio structure and asset allocation.

“The need for work at this strategic and systemic level has been identified as a result of PRI’s experience in its first six years, and that of signatories more broadly,” the PRI says.

The PRI will set up a ‘work stream’ which will review existing research, possibly commission new work, develop proposals for practical action by investors and policy-makers and facilitate collaboration by investors to make any changes that are identified.

The consultation document acknowledges that investors’ “practices and behaviours” were a significant factor in the loss of value to portfolios caused by the financial crisis.

“Short-termism, encouraging the de-linking of the financial economy from the real economy, inadequate corporate governance and ownership practices, high levels of risk and leverage, and use of certain derivatives all helped to inflate the bubble and to magnify the impacts when it burst,” it says.
It was clear the PRI needs to continue to focus on “compiling and articulating” the business case for incorporating environmental, social and governance (ESG) into investment strategy and processes – and on “enabling and mobilising asset owners to integrate responsible investment into their relationships with their investment managers”.“But quite clearly more is needed if capital markets are to become truly sustainable and PRI is to achieve its mission.”

The consultation puts forward some suggestions for possible topics – while admitting that the range of potential projects is “enormous”.

The first two areas identified are company short-termism and investor short-termism. The latter concerns mandate design and the alignment of interests between asset owners and fund managers. “Work in this area could explore performance periods, benchmarks, portfolio turnover, fee structure and the specification of overall objectives and targets,” the PRI suggests.

“If damaging short-termism is to be addressed, these incentives need to be restructured,” the PRI adds.

Another possible area of focus is portfolio structure and strategic asset allocation. Work in this area, it is suggested, could look at real vs. financial assets, definitions of asset classes, active vs. passive management and investment horizons.

Other potential topics are externalities, financial market stability, company disclosure and financing a sustainable economy.

The PRI stresses that it will not go-ahead without signatory involvement and support. It will have one full-time member of staff dedicated to the project, supported by a modest research budget – although in the medium term it hopes to get funding from other sources such as governments, international organisations and foundations. It has hired a fundraising manager for this.

The deadline for responses is March 8, with the first projects being proposed at the end of April. Working groups of signatories will then be formed as soon as possible.

The PRI will host two webinars during February on the project. Link