Are environmental, social, and corporate governance (ESG) considerations emerging from their long-time relegation to a niche investment strategy and moving more fully into the mainstream, seeing acceptance and interest from money managers across the board?
I’ve asked dozens of experts this question over the past several months – money managers overseeing funds of all shapes and sizes, asset owners, mainstream sell-side researchers, ESG research providers, among others – and with remarkable consistency, they’ve answered: 1) No, we can’t call ESG mainstream yet, but 2) it looks to be gaining speed as it heads in that direction, and a major driver of that pick-up is the United Nations-backed Principles for Responsible Investment.
Launched in 2006, the UN PRI initiative centers on six principles, all surrounding the goal of integrating ESG factors into investment decisions. This integration takes as many forms as there are investment strategies. Examples could include factoring portfolio companies’ carbon output into their risk profiles or considering human rights violations in a company’s supply chain to be as much a blemish as a problem on the balance sheet.
When the principles were introduced four years ago, PRI had 56 signatories – asset owners, money managers and others who endorsed the principles and pledged to tailor their own processes to reflect the PRI philosophy. Today, the principles have over 870 signatories, representing about $25 trillion in assets.
Thanks to the PRI initiative’s rapid growth and a roster that includes some of the world’s largest financial institutions, pension funds, and service providers, it’s managed to organize and expand the conversation around ESG integration in a way that many point to as game-changing.
And within the PRI initiative, sights are set higher still. Jamie Dettmer, director of communications for PRI, says 2011 will be a defining year for the initiative. “I think that PRI has come of age,” he says. “So it’s going to get a lot more serious. It’s going to get more professional, and it’s going to provide more for its signatories.”
The first official change that PRI is instituting this year is the one that will fund all of the others: As of April, fees will be mandatory of all signatories rather than voluntary (about a third of signatories contribute financially as is). Fees will be on a sliding scale, and range from $530 to $10, 650 annually.
Dettmer says the fees are critical in funding staff expansion in areas like the recruitment of new signatories. For example, the PRI has made clear that it would like to focus on bringing in more money managers whose asset classes are underrepresented on the current list (particularly private equity and property managers), but staff limitations have been a hindrance in going about that goal strategically.
However, Dettmer hastens to add that a desire to build out recruitment wasn’t the main catalyst for the shift to mandatory fees. Rather, it was the desire to develop and improve services for the signatories the PRI already has.
In January, the PRI launched a new public advisory council, a forum of investors and policy makers who will meet several times a year to discuss responsible investment with regard to possible policy changes.
Likely beginning in 2012, the PRI will also be expanding its offerings in ESG research. Says Dettmer: “We have an academic network, but we want to expand that area. We have a lot of investors who say, ‘I would love to have more research on particular areas;’ we have a lot of academics who say, ‘There’s a lot of raw data your investors have – I would love to be working on some of that.’”
One change Dettmer says we shouldn’t expect to see is a shift from principles that are aspirations to prescriptive ones. He says such a change would be counterproductive to the philosophy of the project, creating an unhelpful level of exclusion and imposing one fixed set of rules across a wide range of signatories, to whom they couldn’t possibly all apply. “We want this to be a big tent,” Dettmer says.
That said, in 2012, the PRI will begin mandating a certain level of transparency of everyone under that tent. The end-of-year reports that each signatory is asked to fill out to document progress in the ESG implementation process will be made public (about 40 percent of signatories who fill them out make them public voluntarily).
The thinking behind that change is twofold, says Dettmer. First, it’s a way to address the occasional criticism that the PRI isn’t doing enough to affect change in its signatories – an argument that Dettmer calls “misplaced.”
“The second reason is, we think it’s a good story to tell, through that transparency,” Dettmer says. “There’s quite tremendous progress being made. And that’s a more important reason than trying to get out ahead of criticism.”
