1 March 2013
Principles for Responsible Investment
Dr Wolfgang Engshuber, PRI Chair
Fiduciary duty
“Integrating ESG considerations into an investment analysis so as to
more reliably predict financial performance is clearly permissible and
is arguably required in all jurisdictions”
1
Fiduciary duty
“in our opinion, it may be a breach of fiduciary duties to fail to take
account of ESG considerations that are relevant and to give them
appropriate weight, bearing in mind that some important economic
analysts and leading financial institutions are satisfied that a strong
link between good ESG performance and good financial performance
exists.”
A legal framework for the integration of environmental, social and
governance issues into institutional investment. UNEP FI &
Freshfields, Bruckhaus, Deringer (2005).
2
The PRI Initiative starting point
An investment belief
‘As institutional investors, we have a duty to act in the best long-
term interests of our beneficiaries. In this fiduciary role, we
believe that environmental, social, and corporate governance
(ESG) issues can affect the performance of investment portfolios
(to varying degrees across companies, sectors, regions, asset
classes and through time). We also recognise that applying these
Principles may better align investors with broader objectives of
society.’
3
Principles for Responsible Investment
1. Incorporate ESG issues into investment analysis and decision-making
processes
2. Be active owners and incorporate ESG issues into our ownership policies
and practices
3. Seek appropriate disclosure on ESG issues by the entities in which we
invest
4. Promote acceptance and implementation of the Principles within the
investment industry
5. Work together to enhance our effectiveness in implementing the Principles
6. Report on our activities and progress towards implementing the Principles
4
Principles for Responsible Investment
• The PRI is a partnership between the United Nations and investors
to promote responsible investment
• A framework of six Principles which guide ESG integration
• Voluntary and aspirational
• Shared learning, implementation support and engagement
• A forum for discussion and action on long-term risk issues and
value drivers
5
Materiality of ESG
‘High Sustainability companies significantly outperform their
counterparts over the long term, both in terms of stock market and
accounting performance’.
The Impact of a Corporate Culture of Sustainability on Corporate
Behavior and Performance - Eccles & Serafeim, Harvard Business
School (2012)
6
ESG issues
7
Implementation support work streams
Fixed income Listed equity Property Private equity Infrastructure
Commodities Hedge funds Inclusive finance
ESG-themed investing
Small signatories
Implementation support
Getting started
• Building and communicating the business case for responsible
investment. (The Why? What? And How? Of responsible
investment)
• Guidance for asset owners on writing a responsible investment
policy
• Aligning expectations guidance for asset owners on incorporating
ESG factors into manager selection, appointment and monitoring
9
Getting started
• Establish the rationale for pursuing RI
• Organise RI governance and human resources
• Define what RI means to your organisation
• Source and disseminate research
• Develop a RI policy
• Join the RI debate (CDP, IIGCC, EITI, local SIF etc.)
• Familiarise yourself with PRI’s reporting requirements
• Create a budget
Guidance for asset owners on writing a
responsible investment policy
Examples from:
• Caisse de dépôt et placement du Québec
• CalPERS
• CalSTRS
• Canada Pension Plan and Investment Board
• Comité syndical national de retraite Bâtirente
• General Board of Pension and Health Benefits of The United
Methodist Church
11
2011 Report on Progress - highlights
Asset owners
• 40% of external assets of PRI asset owners managed by PRI investment
managers
• One third of PRI asset owners write ESG into manager contracts
• Asking for evidence that ESG is integrated into research and investment
processes
• Asking how ESG is integrated into management structures and processes,
staff training, etc.
• Asking their investment consultants for guidance on ESG
12
Integrating ESG criteria in manager
selection, agreements and monitoring
Key questions for asset owners to ask managers:
• How are ESG factors incorporated into investment analysis and
decision-making processes? (e.g. asset allocation, definition of the
investable universe, fundamental or sector analysis, portfolio
construction, stock selection, etc.)
• How do you use ESG information to identify investment risks and
opportunities or opportunities for engagement? How does this
information impact investment decisions?
• How do you consider ESG factors in your analysis of a country’s
economic growth and macro themes that may impact a country
such as resource security?
13
Integrating ESG criteria in manager
selection, agreements and monitoring Key questions for asset owners to ask managers:
• Do you assess how ESG factors affect industries, for example,
through changing consumer preferences or regulatory change such
as environmental legislation?
• How do you assess a company’s ability to identify and manage
ESG-related risks and opportunities?
• How would you respond if you identified under-managed ESG risks
within the investment? (e.g. engage with the company to influence
change, change stock weighting)
• How do you integrate ESG factors into the financial valuation of an
investment?
• How do you approach the analysis of investment risks that may
have a low probability but a severe impact?
14
What is active ownership?
Possible actions:
• Exercise voting rights or monitor compliance with voting policy
• File shareholder resolutions consistent with long-term ESG
considerations
• Engage with companies on ESG issues
• Participate in collaborative engagement initiatives
• Participate in the development of policy, regulation, and standard
setting (such as promoting and protecting shareholder rights)
15
PRI Clearinghouse
Vision: to be the leading global platform of shareholder engagement
activities
Purpose: to provide institutional investors with resources and
information to conduct effective collaborative engagements with
companies and policy-makers across different sectors and regions.
16
Clearinghouse engagements
17
Recent engagements
CDP Carbon Action initiative
Call to companies to move ‘from disclosure to action’.
18 PRI signatories engaged with 24 companies from sectors including
oil & gas, metals & mining, industrials and utilities, to encourage them
to set a good quality emissions reduction target.
Outcome after the 1st year:
• 10 of the target companies had set and disclosed an emissions
reduction target
• 3 companies demonstrated through dialogues that they are taking
steps
18
Recent engagements
Senior gender diversity
Companies that effectively incorporate diversity into their management
teams will be better able to attract and retain talent, better reflect the
composition of society as a whole, and be more likely to be successful
in a competitive global market over the long term.
10 investors engaged with companies in their national markets (US,
Canada, Brazil, Sweden, UK and Italy) to encourage greater
representation of women at board level and in senior management,
and to promote greater disclosure by companies on gender diversity.
45 companies in the target list - improvements in 2011 versus 2010 in
companies’ policies and implementation activities to promote gender
diversity, including enhanced nomination charter language.
19
Recent engagements
Emerging Markets Disclosure Project, South Korea
Investor collaboration aimed at improving disclosure of ESG data by
companies in emerging markets. Over 2008-2012, country teams in
Brazil, Indonesia, South Africa and South Korea engaged 72
companies and achieved their goal of advancing sustainability
reporting in emerging markets.
In South Korea a group of 8 investors engaged with 15 companies.
Progress on reporting with all 15 companies engaged, including Hynix,
LG Electronics, Samsung and Shinhan Financial Group.
20
Recent engagements
Annual engagement with inactive participants of the UN
Global Compact
Coalition of 30 PRI signatories representing approximately US$3
trillion in assets sent letters to the chief executives of listed
participants in the Global Compact that had not communicated their
progress in implementing the UN Global Compact principles.
Following the engagement, 76% of companies regained active status
as UN Global Compact participants. Among the companies that have
submitted their COPs and regained active status are Deutsche
Postbank AG (Germany), Ghabbour Auto SAE (Egypt) and OCBC
Bank Ltd (Singapore).
21
Recent engagements
Anti-corruption engagement
Coalition of 21 PRI signatories began engaging with 20 companies in
14 countries in March 2010 to seek better disclosure and determine
whether their anti-corruption management systems complied with
international reporting frameworks.
Each of the 20 companies was deemed to have poor anti-corruption
systems in place at the start of the engagement, based on publicly-
available information, yet faced high levels of corruption risk. At the
end of the engagement three quarters of the companies targeted
significantly improved their transparency, enabling investors to better
assess and manage their exposure to the financial, operational and
reputational risks associated with corruption in their portfolios.
22
Engagement priorities
23
Topic Engagements
Environment
1) Carbon Disclosure Project - Carbon Action
2) Sustainable Palm Oil
3) Water
4) Fracking
Social
5) Labour standards in the supply chain
6) Human Rights
7) Human capital management
Corporate Governance
8) Corruption
9) ESG and remuneration
10) Board nomination process
UNGC Principles
11) PRI for Rio
12) COP leaders and laggards
13)ESG Investor Briefing
ESG Disclosure 14) Integrated Reporting
15) Sustainable Stock Exchanges
Responsible Investment
• Responsible investment is growing rapidly as a mainstream trend
around the world
• Driven by strategic trends in investment, the economy and broader
society
• Enhance risk management and identify new opportunity, within
fiduciary obligations
• Trends towards regulatory support for responsible investment
24
Q&A