Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 10

UNPRI ready to go to the next level

 

Responsible investment is one of the biggest investment trends of the 21st century. In part, this is driven by the realisation that the world around us is changing rapidly. Food, water and energy security, natural resource scarcity, climate change, human rights, labour standards and demographic change have all become material issues for companies, while the financial crisis highlighted the need to foster long-termism within financial markets and improve the alignment of interests across the investment chain. Investment policies and processes now need to evolve to capture a broader range of risks and opportunities, over longer periods of time, than ever before.

Fortunately, a global network of like-minded organisations trying to figure out what all of this means for investment risk and return already exists. Supported by the United Nations, the goal of the Principles for Responsible Investment (PRI) Initiative is to increase understanding of the relevance of environmental, social, and governance (ESG) issues for the investment community and encourage investors everywhere to be more active owners of the companies in their portfolios. By implementing the PRI’s six Principles and putting responsible investment into practice, some 1,200 signatories to the PRI around the world are at the forefront of creating a more sustainable financial system and helping to prevent the next financial crisis. Never before has the role of the investor in creating an enabling environment for the growth of a sustainable economy been so important. And that’s why, earlier this year, I took up the post of Managing Director at the PRI in London.

On many measures, the PRI has been very successful since its launch in 2006. Signatories manage combined assets of USD $34 trillion, or nearly one-fifth of global capital. It has greatly increased the level of transparency around the activities and capabilities of its signatories. In 2011, nearly 550 of them completed the PRI’s annual reporting and assessment survey outlining how they are putting the Principles of ESG incorporation, active ownership, transparency, collaboration, and disclosure into practice. It has also fostered greater collaboration between investors and supported their engagements with companies and policymakers on ESG issues on a scale simply not possible before. Over 2011/12 alone, signatories contacted more than 1,300 companies via the PRI’s clearing house platform to encourage them to improve their performance or disclosure on ESG issues.

Australian investors are naturally very attuned to environmental and social issues and it should come as no surprise that the PRI’s Australian network, managed by the Australian Council of Superannuation Investors (ACSI), is one of its largest and fastest growing, with 125 signatories and counting. One quarter of these are superannuation funds, so yours may be among them.

Despite this progress, there is still a long way to go before responsible investment can truly be considered mainstream. We know that the way the market currently works, through the investment chain from asset owners via investment managers to companies, does not always serve the true long-term interests of the millions of ordinary Australians who save through super funds or insurance products. The financial crisis gives the responsible investment community an opportunity – indeed a responsibility – to address sustainability challenges more strategically than it has done to date.

The responsible investment community needs to lift its sights and become more engaged with the nuts-and-bolts of the investment chain, the portfolio-wide implications of ESG externalities, and the stability and health of the market as a whole. Portfolio turnover, performance monitoring periods, benchmarks, fees and real long-term alignment of interest between asset owners, asset managers and companies all need to be part of responsible investment’s territory.

To inform this re-tuning of the investment chain, we need to understand far better how long-term externalities and market failures such as climate change will impact whole portfolios, across asset classes, and how investors can respond. The objective here is to ensure that the whole investment chain is focused consistently on long-term value creation. This should ensure that far greater account is taken of environmental and social sustainability issues than at present.

We also need to explore how far it is in investors’ financial interests to encourage policy action to bring externalised sustainability costs on to companies’ books. For some years now investors have supported strong government action on climate change. We need to strengthen work on climate change, and explore applying the same principle to other issues. All this will not in itself change investors’ fundamental objectives, but it will significantly increase the overlap between investors’ long-term financial interests and environmental or social objectives as seen from the public interest perspective.

Finally, we need to address the functioning and stability of the financial system as a whole. The overriding purpose of superannuation funds and other long-term savings institutions is to deliver financial security in retirement to millions of ordinary people. To do this, these investors depend on markets that are stable, well regulated, transparent and fair. As we have seen, poor governance of the market as a whole can be hugely damaging to long-term investors’ interests. At the policy level, a small number of the largest asset owners are already engaging actively with policy makers and regulators on the new market frameworks that are being put in place in response to the financial crisis. The more institutions become involved in work of this kind, the greater the chance that the re-modelled financial system will be fully aligned with their interests.

This agenda calls for a whole new level of vision and courage from the responsible investment community. We need to apply existing research insights and experience better, develop new tools, re-engage with the leadership levels within investment institutions, collaborate more effectively, and be bolder in allocating resources.

Fiona Reynolds is Managing Director of the Principles for Responsible Investment Initiative, based in London.

 


 

Leave a Comment:

     

RELATED ARTICLES

ESG by new means, to new ends

Top 10 ESG issues for 2019

Investment learnings from the COVID-19 crisis

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.