January 24, 2011 - In 2006 when the United Nations spearheaded the Principles of Responsible Investment (PRI), the program began tackling a real and growing global problem. How do you deliver superior risk-adjusted returns and still consider environmental, social and governance issues? And how do you make sure that multinational businesses benefit both their stakeholders and the communities they operate in? The PRI may finally be ready to referee such problems and help initiate dialogues and conversations between all the stakeholders – the companies, the investors and the communities.
The problems have become more acute in recent years in some highly visible sectors of the global economy, especially banking, oil and gas and mining. Mining multinationals, such as Rio Tinto and BHP, are seen as hauling big profits from mining contracts in Africa and Asia while leaving a trail of environmental damage.
Banks such as Citigroup have been charged for selling risky financial instruments to rural communities in Norway without adequately informing them of the hazards. And oil giants, including BP and Exxon Mobil, continue to report billions in profits in spite of massive disasters like the devastating Gulf oil spill.
Today, PRI is in a stronger position to offer solutions to these problems through the support of its growing global network of peer investors. It has reached a critical mass of signatories as global institutional investors are increasingly recognizing the need to consider environmental, social and corporate governance (ESG) issues when investing. At year-end, PRI had 855 signatories from 45 countries that control $22 trillion of assets under management – almost 10 percent of the global capital market.
And PRI has reorganized itself – from an organization affiliated with the UN and dependent on signatory donations – to a standalone organization supported by mandatory fees from its signatories. More importantly, it is putting together a professional staff headed by James Gifford, who has been with the organization since its inception. A professional staff enables the organization to diversify across asset classes and move into areas where its presence needs greater focus and involvement.
Stung by criticism that its signatories do not practice what they preach, PRI is asking greater transparency and forthrightness from participating investors to disclose what they are doing to implement PRI principles. “The PRI board believes that signatories must be transparent about the actions that they are taking,” said Gifford in a recent interview.
Gifford says shareholders are becoming mindful that failure to engage management in ESG issues could also lead to reputational damage. To connect with the investment community collectively, PRI is proposing the “Fifth Analyst Call,” a dedicated conference call for institutional investors focused exclusively on corporate governance as reflected in the annual proxy statement. The “Fifth Analyst Call” would serve a purpose similar to standard quarterly results calls but follow the publication of the proxy statement and precede the annual shareholders meeting, the organization notes.
One of the biggest problems for PRI has been the perception that it is a European construct, with narrow relevance for U.S. institutional investors. But greater shareholder activism at home and the willingness by many institutions to seek offshore managers is forcing the hand of many. Among recent U.S. asset managers to join are T. Rowe Price (about $400 billion in assets) and Iowa’s Principal Group ($233 billion in assets).
“T. Rowe Price supports the Principles for Responsible Investment framework as an effective means of encouraging dialogue among investors and improving disclosure from companies globally,” noted Heather McDonald, a spokesperson for the Baltimore-based money manager. “By becoming a PRI signatory, we gain access to a robust offering of conference calls, publications and networking opportunities open only to PRI members. We believe many of these programs may be of interest to the firm’s investment teams and our clients,” she added.
The need for conversations about ESG and corporate governance today is greater than ever, and asset managers are discovering that it is better to be on the side of the angels. But it is going to be up to organizations such as PRI to force the issue.
