An investor initiative in partnership with UNEP Finance Initiative and UN Global Compact AFOR RESPONSIBLE BLUEPRINT INVESTMENT GENESIS, ASSUMPTIONS AND PROCESS RESPONSIBLE INVESTORS SUSTAINABLE MARKETS A PROSPEROUS WORLD FOR ALL www.blueprint.unpri.org @PRI_News – #PRIBlueprint Introduction: Creating the Blueprint 3 RESPONSIBLE INVESTORS Empower asset owners 11 Support investors incorporating ESG issues 15 Foster a community of active owners 18 Showcase leadership and increase accountability 22 Convene and educate responsible investors 25 SUSTAINABLE MARKETS Challenge barriers to a sustainable financial system 28 Drive meaningful data throughout markets 32 A PROSPEROUS WORLD FOR ALL Champion climate action 36 Enable real-world impact aligned with the SDGs 40 Measuring success 45 A blueprint for responsible investment, published in May 2017, set out the PRI’s vision for how the PRI and the wider responsible investment community should progress over the next 10 years. This supplement explains the genesis of the blueprint project, the assumptions we’ve based our thinking on and the process we went through to reach the agenda that A blueprint for responsible investment sets out. 2 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 INTRODUCTION: CREATING THE BLUEPRINT 3 THE BLUEPRINT responsible, adj. and n. (rᵻˈspɒnsᵻbl) Being appointed to look after something. Answerable to another person for something. Morally accountable for one’s actions; capable of rational conduct. Deserving of credit (or blame) for something. Capable of fulfilling an obligation or duty; reliable, trustworthy, sensible. Of a practice or activity: carried out in a morally principled or ethical way. sustainable, adj. (səˈsteɪnəbl) Capable of being maintained or continued in the long term. Capable of being upheld or defended as valid, correct, or true. prosperous, adj., (ˈprɒsp(ə)rəs/ Flourishing, thriving. Consistently successful, esp. economically. Of a person or community, relating to well-being: the state of being healthy, happy. 4 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 Over the next 10 years, the PRI will focus on the following areas of impact: RESPONSIBLE INVESTORS We will strengthen, deepen and expand our core work: to lead responsible investors in their pursuit of long-term value and to enhance alignment throughout the investment chain. • EMPOWER ASSET OWNERS • SUPPORT INVESTORS INCORPORATING ESG ISSUES • FOSTER A COMMUNITY OF ACTIVE OWNERS SUSTAINABLE • SHOWCASE LEADERSHIP AND MARKETS INCREASE ACCOUNTABILITY We will address unsustainable aspects of the markets that investors operate in, to achieve • CONVENE AND EDUCATE the economically efficient, sustainable global RESPONSIBLE INVESTORS financial system that responsible investors and beneficiaries need. • CHALLENGE BARRIERS TO A SUSTAINABLE FINANCIAL SYSTEM • DRIVE MEANINGFUL DATA THROUGHOUT MARKETS A PROSPEROUS WORLD FOR ALL We will enable signatories to improve the real world – now and in the future – by encouraging investments that contribute to prosperous and inclusive societies for current and future generations. • CHAMPION CLIMATE ACTION • ENABLE REAL-WORLD IMPACT ALIGNED WITH THE SDGs 5 This supplementary guide on the genesis, assumptions Its report recognised the global leadership position and process of the Blueprint project aims to provide the PRI has established, and our success in helping additional context and explanation for the decisions we to embed ESG issues within the core processes of have made. investors around the world. However, it also concluded that considerable work remains to be done to make all As always, the PRI welcomes continuing input from investment responsible. It also recommended that the signatories and other interested parties to shape our PRI seek to create greater clarity about its purposes work within the Blueprint programme, in pursuit of the and ambitions. goals we’ve laid out. As a signatory organisation, the progress the PRI can make towards those goals will Alongside that work, and in line with the emphasis the depend on the actions of our signatories. PRI places on working on behalf of our signatories, we have carried out several surveys and consultations with our signatory base. Among other things, these have Our aim over the next 10 sought views on the PRI’s goals and evolving Mission. years is to bring responsible These include the 2016 Signatory satisfaction and investors together to engagement survey, the latest in the PRI’s regular collection of signatory views on the effectiveness, work towards sustainable performance and governance of the organisation.3 We markets that contribute to a also conducted a consultation entitled Recognising diversity, strengthening accountability, to help more prosperous world for determine how the PRI might better reflect the diversity of our signatories, and whether the PRI should all. introduce additional measures to incentivise signatories to make progress on responsible investment.4 The Blueprint process In addition, we carried out the Sustainable Financial System, Principles, Impact consultation. It sought The development of the Blueprint followed an external views on: the obstacles that exist to creating a financial evaluation of the PRI’s achievements, impacts and system that is fit for purpose; the use of the SDGs as a challenges by sustainability consultant Steward means to assess the impact of responsible investment; Redqueen.2 It sought to chart the progress of whether the six Principles should be updated; how the implementation of the Principles across the investment PRI might seek to define its success.5 industry since 2006, using activity and data from that year as a baseline, and involving interviews with In parallel with these consultations, which generated signatories and stakeholders as well as survey data. almost 700 written responses, in 2016 the PRI carried out a series of workshops with signatories and 2 PRI (2016), From principles to performance, (PRI, London) 3 PRI (2016), PRI signatory satisfaction and engagement: 2016 survey chartbook, (PRI, London) 4 The consultation document is available here, while an executive summary of feedback can be found here. 5 The consultation paper is available in English. French, German and Portuguese versions are available. Responses are summarised here. A report, Sustainable financial system: nine priority conditions to address, was published by PRI in September 2016. 6 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 stakeholders in 21 cities around the world, attended by Finally, our executive team and chair have presented more than 2,000 delegates. our thinking at major industry events, including to over 600 delegates representing about 350 organisations at In addition, our thinking has built upon the work of PRI in Person in Singapore in September 2016. peer organisations, including landmark reports such as Ceres’s Blueprint for Sustainable Investing,6 the UNEP Inquiry into the Design of a Sustainable Financial System,7 The Investment Integration Project’s work Framing the challenge on portfolio-level ESG integration,8 the European Since the PRI was established, a core part of its work Commission’s communication on long-term finance,9 has been to promote the incorporation of ESG issues and the World Economic Forum’s report on the global into investment processes. Our signatories believe that financial system.10 this leads to better long-term financial outcomes, and is therefore a fiduciary responsibility for investors. The 21st Century Investor: Ceres Blueprint We have made significant progress on ESG for Sustainable Investing incorporation, but it needs to become broader and deeper. Broader, in that it is applied across all asset Where the PRI’s Blueprint for responsible investment classes and in institutions and jurisdictions that are just describes the role that the PRI will seek to play in beginning to engage with responsible investment, and guiding the broad direction of the overall responsible deeper, so that ESG management becomes an integral investment industry over the next decade, Ceres’s part of investment processes throughout the investment 2013 report The 21st Century Investor: Ceres chain. Blueprint for Sustainable Investing11 (updated 2016) offers a specific 10-step guide on what investors In addition, we recognise that deep incorporation of including PRI signatories can do within their own ESG factors, achieved by applying the six Principles, organisation to embed ESG factors into investment relies on a supportive enabling environment. This policy and practice. means government policies, market structures and financial actors all working positively within the financial This “virtual owner’s manual”, whose 10 steps system for sustainable outcomes. The Principles should are mapped against the six Principles, references not be seen in isolation, but instead as a means to an many PRI materials along the way. We encourage end: a sustainable financial system. signatories to consider its guidance, alongside that offered by the full suite of PRI resources available at www.unpri.org, as they continue their responsible investment journey. 6 Ceres (2013), The 21st Century Investor: Ceres Blueprint for Sustainable Investing (Ceres, Boston) 7 UNEP (2015), The Financial System We Need: Aligning the Financial System with Sustainable Development. (UNEP, Geneva) 8 Lydenberg, S. (2015), Portfolios and Systemic Framework Integration: Towards a Theory and Practice. Exposure Draft (16 November 2015) (The Investment Integration Project (TIIP)) 9 European Commission (2014), “Communication from the Commission to the European Parliament and the Council on Long-Term Financing of the European Economy. COM/2014/0168 Final. 10 World Economic Forum (WEF) (2015), The Global Financial System: Policy Recommendations for the Future (WEF, Geneva) 11 Ceres (2013), The 21st Century Investor: the Ceres Blueprint for Sustainable Investing (Ceres, Boston) 7 We have been working with our signatories to help promote such a financial system since 2006 with our Setting out our approach work on investment practice. The Principles focus on In thinking about the future of our work in the context investor activities, specifically the relationship between of the Blueprint, we have been mindful of our strengths investors and the companies in which they invest. But and the value we bring – and aware of our limitations. investors are connected to all the other actors and influence the financial system. Likewise, the behaviours The PRI is a unique organisation. We have a global of other actors influence how “responsible” investors signatory base. The assets for which our signatories can be in practice. are responsible represent a majority of the world’s professionally managed investments. We bring together Responsible practices by investors are therefore asset owners, investment managers and service necessary but not sufficient to deliver a sustainable providers in one body. Our genesis, as a UN-supported system. Without a better enabling environment, organisation, and our continuing strong links with the adoption of the six Principles and ESG integration UN – centred on our long-standing partnership and will not be enough to achieve the PRI’s Mission. collaboration with the UN Global Compact and the Responsible investors need a financial system that UNEP Finance Initiative – enhance our credibility. works with, not against, their pursuit of long-term value, incentivising long-term investment, taking into account We can also bring substantial intellectual capacity to social and environmental impacts beyond the reach of bear. The PRI itself has built up considerable human any individual investor, and that works in the interests capital resources, and through our signatories and of its ultimate beneficiaries. partners we have access to the world’s leading practitioners of, and thinkers on, responsible It is also fundamental to the work of the PRI, and to investment. our signatories, that responsible investment practices deliver real-world impact in terms of improved All of this gives the PRI unique convening power. environmental and social outcomes. We believe that the We have demonstrated our ability to bring together SDGs provide a framework to deliver improved social, investors, policy makers, regulators, companies and environmental and economic outcomes, benefitting academics to address issues around responsible our signatories and, crucially, their beneficiaries. By investment and ESG integration. strengthening the link between the work of responsible investors and the SDGs, we will be better able to As a signatory organisation, the PRI exists to create understand and measure investors’ contribution to value for our signatories. They have been clear in the kind of world their beneficiaries want – one of identifying where they believe we add that value. prosperous and inclusive societies in a healthy natural environment. 8 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 We help by sharing knowledge about ESG integration, • Do we have the capacities and capabilities we need by supporting networking, sharing best practice to make a meaningful contribution? and helping signatories interpret developments in We now have a robust policy capacity, including responsible investment. We enable collaboration among staff experienced in public policy, programme signatories on ESG issues where collective action is management and change management. more effective than investors acting alone. We work • Can we deliver the projects or interventions in with our signatories to set standards on reporting question? and assessment of responsible investment practices and outcomes, helping to promote transparency We have a tried and tested model for scaling up and performance and we offer a global platform to and delivering change projects on investment and promote responsible investment and to advocate for policy. policy, regulation and system reform. This Blueprint • Does the issue in question require extensive and the vision for PRI’s role over the next 10 years consultation and dialogue with investors or other were developed with close regard to our organisational stakeholder groups? values, our comparative advantage and to the value we We have an established track record of bring our signatories. consultation with the investment industry and wider stakeholder groups on a variety of issues. Determining our priorities This process has led the PRI to identify nine action In deciding which initiatives to bring forward as part areas, set out over the following pages. These of our 10-year vision, the fundamental questions we initiatives, which we will bring forward working in asked were: Would the initiative address an issue of collaboration with our signatories and UN partners, will importance to our signatories? Would it help promote a help the PRI further our Mission and deliver value for sustainable system? our signatories Then, we carefully considered whether the PRI’s strengths and value proposition position us to make a material contribution to addressing the issue in question. Specifically, we have used the following criteria to assess potential action areas: • Is there a representative role for investors in correcting or mitigating the causal factor or the symptoms that result? • Is there is a role for the PRI and our signatory base? The PRI is an authoritative, credible body with a large signatory base. 9 Why the Blueprint? The result is A blueprint for responsible investment1, which sets out nine action areas, grouped under three The Principles for Responsible Investment (PRI) were areas of impact – responsible investors, sustainable launched in April 2006 at the New York Stock Exchange markets and a prosperous world for all: by the United Nations’ then Secretary General Kofi Annan. They launched with 32 signatories from nine • Through the Blueprint, we aim to strengthen, countries. Over the following decade, the organisation deepen and expand our core work with responsible firmly established itself as the global voice of the investors to help them in their pursuit of long- responsible investment movement. More than 1,750 term value and to enhance alignment of interests asset owners, investment managers and service throughout the investment chain. Specifically, we providers, from over 50 countries and representing aim to empower asset owners, support investors approximately US$70 trillion in assets, are now in their incorporation of ESG issues, foster a signatories. community of active owners, showcase leadership and increase accountability and convene and help This critical mass, allied with our roots in the UN educate responsible investors. system and underpinned by the skills, competencies • To promote sustainable markets, we will work to and credibility the organisation has built over the last remove barriers to a sustainable financial system decade, give the PRI unique convening power. It creates and to drive meaningful ESG data throughout possibilities to materially influence the development of markets. responsible investing and the broader financial system, ultimately with the aim of delivering the PRI’s Mission of • Finally, in working towards a prosperous world achieving a sustainable global financial system focused for all, we will help our signatories take action to on creating long-term value. address climate change and enable them to have real-world impact on sustainability challenges, as We believe that such a system will not only reward its defined by the UN Sustainable Development Goals users financially, but also benefit the environment and (SDGs). society as a whole. Achieving our Mission will deliver real-world impact in terms of better outcomes for the In addition, we will be transparent in tracking the financial system’s ultimate beneficiaries. implementation of our 10-year ambitions, setting out a series of three-year strategies and developing and As we marked our 10-year anniversary, we took the reporting on key metrics to measure our progress. opportunity to evaluate our impact so far and to consult extensively with our signatories on the best path ahead Significant time and resources were dedicated to to make progress towards achieving our Mission. considering, consulting on, and debating how the PRI should aim to support our signatories and work towards fulfilling our Mission over the next 10 years. 1 PRI (2017), A blueprint for responsible investment, (PRI, London) 10 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 RESPONSIBLE INVESTORS EMPOWER ASSET OWNERS 11 Asset owners set the direction of markets: the mandates they award to managers determine the objectives that the world’s biggest pools of money are put to. To fulfil their duties to beneficiaries in the 2020s and beyond, asset owners will need robust approaches to investment that acknowledge the effects their investments have on the real economy and the societies in which their beneficiaries live. The institutions representing the holders of long- For example, fewer than half of asset owner signatories term retirement savings – pension funds, sovereign include specific guidelines on environmental and social wealth funds, foundations, endowments, insurance issues in their policy and guidance documents, and and reinsurance companies – sit at the top of the only 44% include specific contractual requirements for investment chain. It is their investment policies, investment managers to incorporate ESG issues in their strategies and the mandates they award to investment investment decision making.13 managers that set the objectives and scope of investment practice and the direction of travel for We’ve found that there are a number of internal investment markets. In addition to these investment and external reasons why asset owners are not signals, responsible investors send policy signals, fully implementing their responsible investment encouraging policy makers to introduce measures and commitments. Internal challenges include board regulations that support responsible investment. and trustee scepticism about the investment value of responsible investment, skills gaps in relation to The majority of the world’s professionally managed ESG analysis and decision making, concerns over assets are held by signatories to the PRI.12 Signatories costs to develop the necessary processes, systems are required to incorporate ESG issues into investment and skills, and a narrow interpretation of investment analysis and decision making (Principle 1) and into their objectives. External challenges include the limited ownership policies and practices (Principle 2). However, range of responsible investment-oriented investment while many asset owners have made commitments to products, and the general lack of interest in responsible responsible investment, most have yet to ensure that investment on the part of investment consultants and these commitments are effectively implemented. legal advisers. Our data shows that sustainability considerations However, for some asset owners, responsible are often missing from asset owners’ investment investment is fully embraced and successfully processes, in particular from the selection, appointment integrated in investment processes. The actions taken and monitoring of investment consultants and by these leaders need to be replicated more widely, investment managers. in line with Principle 4, which requires signatories to promote acceptance and implementation of the Principles within the investment industry. 12 PRI (2015), Report on progress 2015, (PRI, London) 13 PRI (2016), How asset owners can drive responsible investment, (PRI, London) 12 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 Given the important position of asset owners at the • The incorporation of ESG factors in the top of the investment chain, they have always played development of asset owner mandates, a central role in the PRI, in its governance, and in the which play a key role in the investment chain programmes we have developed. and the processes of selection, appointment and monitoring, and which should include asset The PRI’s Asset Owner Insight programme provides owners’ expectations for ESG incorporation, investment guidance and implementation support to active ownership and outcomes to society for the asset owners, with a view to informing them about the investment managers they select;16 and potential for ESG incorporation. It aims to empower • Manager selection, appointment and asset owners to effectively direct investment managers, monitoring, to develop a tool to provide asset consultants and other investment stakeholders through owners with data from the Reporting Framework engagement and contractual arrangements to realise on investment managers’ responsible investment their promises to their beneficiaries. performance. Current and future projects from our asset owner- Over the life of the Blueprint, the PRI will continue to focused work seek to address: evolve practice in the above fields and work to drive portfolio/plan-level ESG incorporation. Besides the • Investment strategies, offering practical effects of ESG incorporation on the risk/return profile guidance for asset owners to outline how of investment portfolios, the guidance for asset owners robust responsible investment strategies can be will increasingly take into account the real-world formulated and developed; influence on sustainable economic development of • Investment policy, developing guidance on how asset owner decision making. to review existing investment policies to include ESG considerations;14 The PRI will help its asset owner signatories to • Asset allocation, addressing the incorporation of recognise long-term global trends that will shape the ESG factors and the SDGs in scenario analysis and future investment environment. Robust investment asset allocation; strategies, which acknowledge the effects investments • The under-representation of corporate have on society and the real economy, will be pension funds in responsible investment;15 prerequisites for asset owners to fulfil their fiduciary • Fund trustee capacity, to address responsible duty in the 2020s and beyond. We will support asset investment issues, including through new training owners in this endeavour by helping them develop and programmes and tools; implement strategies and practices that lead to long- term investment success. 14 PRI (2016), Investment policy: process and practice, (PRI, London) 15 PRI (2017), Aligning values: why corporate pension plans should mirror their sponsors, (PRI, London) 16 PRI (2017), How asset owners can drive responsible investment, (PRI, London) 13 We will undertake initiatives through the Blueprint that will: • champion ESG incorporation throughout organisations, from areas such as strategy, policies and trustee capacity through to portfolio/plan-level decisions, including asset allocation; • enable asset owners to effectively oversee and monitor investment managers, consultants and others in order to meet their responsibilities to beneficiaries; • demonstrate how long-term global trends will shape the investment environment of tomorrow; • establish that asset owners’ duties to their beneficiaries extend beyond the risk/return profile of their investments to include making decisions that benefit the world beneficiaries live in. 14 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 RESPONSIBLE INVESTORS SUPPORT INVESTORS INCORPORATING ESG ISSUES 15 Since the launch of the Principles, the investment industry has made great progress in making ESG factors a part of investment decisions. Deep, systemic incorporation of ESG issues across a firm’s entire spectrum of assets, however, is rare, and for investors who do not yet address ESG issues, getting started can be challenging. The evidence is strong and becoming increasingly It is because of this positive relationship between compelling: ESG issues affect, to varying degrees ESG factors and financial performance that Principle across companies, sectors, regions, asset classes and 1 commits signatories to incorporate ESG issues into through time, the performance of investment portfolios. investment analysis and decision-making processes. Since the launch of the Principles, the investment Deutsche Asset & Wealth Management and Hamburg industry has come a long way with the incorporation of University reviewed more than 2,000 studies carried ESG factors in investment decisions. out since 1970 that examined the relationship between ESG criteria and corporate financial performance. Our signatories are making significant efforts on ESG It found that 62.6% of studies revealed a positive integration. According to disclosures to the PRI’s Report relationship, and only 10% a negative one.17 on progress 2015, some 98% of investment manager signatories apply responsible investment practices to Oxford University and Arabesque Partners came up with their listed equity holdings.21 similar numbers. Of the sources it reviewed, 88% found that companies with robust sustainability practices However, systemic and truly insightful incorporation of showed better operational performance. Similarly, 80% ESG issues across a firm’s entire spectrum of assets demonstrated that prudent sustainability practices had is still relatively rare. For example, in the same set of a positive effect on investment performance.18 A 2015 disclosures, only 16% of the 342 investment managers study from Morgan Stanley’s Institute for Sustainable reporting on listed equity incorporation stated that Investing stated that: “Investing in sustainability has they systematically integrate E, S and G issues into usually met, and often exceeded, the performance of fundamental analysis. Although the PRI does not collect comparable traditional investments.”19 Meanwhile, product-level data, we expect that in many cases in research published in late 2016, Bank of America this will be for specialised products or funds, rather Merrill Lynch found that ESG incorporation could than integrated across signatories’ entire investment have helped investors avoid 90% of bankruptcies in processes. companies that the bank covers, while ESG factors helped predict price and earnings volatility.20 17 Deutsche Asset and Wealth Management (2016), ESG & Corporate Financial Performance: Mapping the Global Landscape (Deutsche Asset and Wealth Management, London). 18 Arabesque Asset Management (2015), From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (Arabesque Asset Management London; the Smith School of Enterprise and the Environment, University of Oxford, Oxford) 19 Morgan Stanley Institute for Sustainable Investing (2015), Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies. (Morgan Stanley Smith Barney LLC & Morgan Stanley & Co LLC, New York) 20 Bank of America Merrill Lynch (2016), Equity Strategy Focus Point: ESG: good companies can make good stocks, (BofA Merrill Lynch Global Research, New York) 21 PRI (2015), Report on progress 2015, (PRI, London) 16 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 The PRI will therefore continue to develop guidance to For investors who do not yet explicitly address ESG help broaden and deepen ESG incorporation across issues, embarking upon ESG incorporation process can assets and throughout the financial industry. be challenging. Over the life of the Blueprint, in high penetration and mature areas of ESG incorporation, Existing resources include: the PRI will focus on the depth of practice and insight. In asset classes where the application of responsible • A practical guide to ESG integration for equity investment approaches remains the exception rather investing, which aims to guide investors in how than the rule – such as commodities, hedge funds and to integrate ESG techniques into investment supranational and asset-backed fixed income – the processes; PRI will continue to create with its signatories some of • our Fixed income investor guide, as well as the basic structures and processes required for ESG specific reports on ESG risks in sovereign and incorporation. corporate bonds, plus a series of fixed income case studies; In addition, we will work with our signatories to help • a number of guides aimed at private equity them respond to emerging ESG issues. For example, investors, including on integrating ESG factors, we have announced a project with investment climate change and guides aimed at both limited consultant Willis Towers Watson to produce a report partner and general partners; on how social, environmental, economic, technological and political megatrends could impact the financial • guides aimed at real estate investors that, system. among other things, explain how to implement sustainability management systems and energy We will undertake initiatives through the efficiency investments; Blueprint that will: • a re-launched work stream on responsible investment in infrastructure to raise awareness • increase the depth of insight and practice in about, provide guidance on and promote asset classes where ESG incorporation is mature investment in low-carbon infrastructure; and penetration high – such as listed equity and • the first ESG due diligence questionnaire for corporate and government debt; hedge funds, to help investors assess hedge fund • build the foundations for ESG incorporation in managers on responsible investment policies and asset classes where it is still new – such as practices; and commodities, hedge funds and supranational and • for commodity investors, a guide to responsible asset-backed debt; investment in farmland and a best-practice guide • lead signatories’ awareness and response to across commodity-exposed asset classes. existing and emerging ESG issues. 17 RESPONSIBLE INVESTORS FOSTER A COMMUNITY OF ACTIVE OWNERS 18 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 Investors who do not have an active relationship with the companies they are invested in risk holding poorly governed companies that do not perform well over the long term, and risk neglecting beneficiaries’ interests. Crucially, for active ownership to be a success, it relies on the investor fully using the information collected when making portfolio decisions. Investors have a much bigger influence on companies when acting together than alone. The world’s financial system is subject to serious Practitioner experience bears this out. For example, principal-agent problems. Its ultimate beneficiaries pensions giant and PRI signatory CalPERS credits its typically rely on several layers of management corporate governance engagement as generating a to ensure that their savings and investments are “CalPERS effect” worth 14.4 percentage points of managed in the beneficiaries’ best interests. At each outperformance against the benchmark index over five layer, oversight and appropriate control must be years.24 exercised to ensure that agents act in the interests of their principals. In well-regulated markets, laws There are clear and intuitive reasons why this should and regulations exist that give principals – whether be the case. Active oversight of company management shareholders, bondholders or owners of real assets – by investors helps ensure that managers act in the the right to exercise this oversight and control. best interests of company owners – the shareholders – rather than in their own interests, on near-term issues Academic research shows that investors’ engagement such as executive remuneration. Second, engagement on ESG issues contributes to sustainability helps investors with long time horizons to influence performance, better quality of management and companies to consider longer-term factors. Third, improved risk-return profiles of target companies, poorly governed companies face reputational risks that to the ultimate benefit of asset owners and their can have serious impacts on share price performance. beneficiaries. Research from London Business School Finally, engagement provides investors with a deeper found successful engagements on ESG issues were understanding of a company’s quality and strategy. followed by abnormal returns averaging 4.4% twelve months after the engagements were concluded.22 A There are also clear advantages to investors study of engagement carried out by the Hermes UK collaborating on their engagement activities: research Focus Fund conclude that it created shareholder value has found that collaboration by investors allows them and fund outperformance.23 to more effectively influence corporate management on ESG issues.25 22 Dimson, E., Karakas, O., Li, X., (2012), “Active Ownership”, conference paper (Harvard Business School, Boston) 23 Becht, M., Franks, J., Mayer, C. and Rossi, S. (2010) Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund. Review of Financial Studies, 23(3), pp. 3093-3129. 24 “CalPERS Effect” Continues to Improve Company Performance, (October 14, 2014) Retrieved from https://www.calpers.ca.gov/page/newsroom/calpers-news/2014/ company-performance 25 Gond, J.P. and Piani, V., (2013). “Enabling Institutional Investors’ Collective Action: The Role of the Principles for Responsible investment.” Business & Society, 52(1), pp. 64-104. 19 Even the largest institutional investors rarely own more This is despite active ownership showing results: in than one per cent of large publicly listed companies, May 2017, a majority of shareholders voted against making it more difficult to get their voices heard when ExxonMobil’s management to force the oil giant to acting individually. Engagement is resource-intensive; publish a report on climate risk, following similar again, few investors have the internal capacity to carry successful motions passed at Occidental Petroleum out in-depth engagements with more than a few dozen Corp. and PPL Corp.27 holdings. Meanwhile, large institutional investors are likely to be universal owners, affected by a range of The PRI will work to encourage signatories to exercise environmental and social externalities. Collective and their rights both individually and collectively as ultimate coordinated action by investors is needed to tackle or potential owners across asset classes. In March such externalities. 2017, we launched our proxy voting declaration system, which allows investors to voluntarily publicly A growing number of investors are undertaking active declare how they plan to vote on ESG resolutions in the ownership, especially in listed equity. In 2007, in forthcoming proxy voting season. Additional work will the PRI’s first Report on progress, around 40 asset seek to ensure that: owners disclosed that they were regularly engaging with investee companies. By 2016, that figure had • the quality of dialogue is prioritised over quantity; risen to nearly 200, whether directly or through • proxy voting practices are consistent with their investment managers. The PRI’s Collaboration investors’ responsible investment strategies and Platform has become an increasingly important policies; resource for engagement – it has hosted more than • coordinated actions independently led by investors 900 collaborations, engaging with almost 1,600 follow clear objectives and milestones; and companies, since its launch in 2006. • information collected through active ownership However, more needs to be done to promote active is fully integrated in financial decision-making ownership by investors in line with Principle 2. processes. Even among PRI signatories, almost one in five (17.9%) reported that they are neither engaging In the next decade, the role of asset owners will also with companies directly or through their investment be pivotal to drive investment managers’ practices, managers.26 Among investment managers, some monitor their activities and keep them accountable of the leading names in the industry – including for achieving financial and sustainability outcomes. some PRI signatories – rarely or never vote against Collaborative engagements will require clear criteria management on ESG resolutions, even whilst warning for prioritisation, well-defined objectives, more robust of environmental and social risks faced by companies. tracking systems to monitor milestones and share information, and defined roles and expectations for participating investors. 26 PRI (2015) PRI Report on progress 2015, (PRI, London) 27 Kerber, R., (May 31, 2017), Exxon vote shows Wall Street diverging from Trump on climate change, Reuters, retrieved from http://www.reuters.com/article/us-exxonmobil- climate-investors-idUSKBN18R3D6 20 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 Broadening and deepening of active ownership We will undertake initiatives through the practices should not be confined to listed equities Blueprint that will: but should be extended to other asset classes and investment entities. This requires substantial • increase signatories’ understanding of how to improvement of current ownership rights linked to exercise their rights as active owners, across all different asset classes. The PRI will respond with asset classes; further guidance for signatories on how to be active • continue to coordinate collaborative engagements owners and by taking a specific asset class focus. A to maximise investors’ collective impact, expanding bondholder engagement project examining what active the coalitions and sharing lessons learnt; ownership means as a fixed income investor is already • promote alignment of proxy voting practices with underway. responsible investment beliefs; In order to achieve impactful investor collaborations, the • enhance the PRI Collaboration Platform to make it PRI will continue to coordinate in-depth collaborative a global hub for active ownership. engagements. More resources will be directed towards expanding coalitions and sharing lessons learnt beyond those investors directly involved. Extensive resources will also be allocated to enhance the PRI Collaboration Platform with the objective to make it a global hub for active ownership to achieve real-world influence and sustainable development. 21 RESPONSIBLE INVESTORS SHOWCASE LEADERSHIP AND INCREASE ACCOUNTABILITY 22 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 We welcome responsible investment new starters, those who have been leading the field for years, and everyone in between. In doing so, it is important to celebrate the successes of the best that others can learn from, to highlight the progress made across the spectrum and to guard against complacency, at the top or the bottom. For signatory status to be meaningful, and for beneficiaries to see the benefits they are entitled to, we must ensure that signatories are living up to the commitments they make when signing up to the Principles. Strong accountability processes will identify opportunities for the PRI to engage with struggling signatories and support progress, and will enable us to respond when signatories are not acting in good faith. The six Principles that inform our Mission are pursuing active ownership, seeking ESG disclosure by aspirational. We acknowledge that the majority of the entities in which they invest, and disclosing their investors are not yet fully implementing responsible own progress in these areas. These commitments investment practices, which makes transparency are not cost-free. Signatories must dedicate time and accountability an important element of our work. and resources to these commitments, especially in Indeed, Principle 6 requires signatories to report on undertaking the annual reporting and assessment their progress towards implementing the Principles. process. Such accountability is necessary to demonstrate the There can therefore be an incentive for signatories to impact that the PRI is having in pursuing our Mission. sign up to the Principles while doing little or nothing It is also important to encourage signatories to improve to meet the commitments involved. This has led to their performance in terms of implementing responsible calls for the PRI to hold signatories more accountable investment. Moreover, it is needed to prevent freeriding for their progress in applying the Principles to their among signatories – an issue that has taken on investment activities, including by delisting signatories greater salience as the Principles become increasingly that do not achieve minimum standards. embedded in the investment world. Improving accountability processes will help the PRI to Becoming a PRI signatory confers advantages in better understand where signatories are not acting in reputational terms and, increasingly, in qualifying for good faith, and where there is an opportunity for the tenders and requests for proposals open only to PRI PRI to engage and encourage signatories to progress, signatories. using our networks and resources. The Steward Redqueen assessment of the PRI recommended However, signing up to the PRI requires signatories such measures, and noted that there is room for to make a number of commitments, including the improvement in the current reporting and assessment incorporation of ESG issues into investment processes, system to reduce the risk of gaming. 23 In this regard, the breadth of the PRI’s signatory base These delistings will be carried out in accordance with presents challenges. As Steward Redqueen noted published criteria and overseen by the PRI Board. An in its assessment of the PRI’s impacts over its first appeals process will be put in place; these will be decade: “The PRI is serving a diverse signatory base, heard by the PRI Board. which contributes to its strength and credibility. This also implies that signatories are in different stages of Conversely, there is merit in providing a means to integrating RI into their investment practices. […] The recognise leading practice among signatories, with challenge for the PRI is to service both front runners a view to encouraging a race to the top. The PRI will and late adopters in a way that satisfies all, while develop and publish a leadership table each year and maintaining a strong brand value.”28 showcase evolving best practices. Steward Redqueen recommended that the PRI design We will undertake initiatives through the positive incentives to recognise and highlight leading Blueprint that will: practice to encourage a race to the top. Ultimately, improved governance and systems for implementing • launch a responsible investment leadership responsible investment processes will feed through to table and awards, to reward and highlight top better outcomes. performers; • share examples of what the best are doing; We are mindful that there is a balance to be struck. The • define a minimum standard of activity that objective will be to delist the worst offenders – those signatories must achieve; signatories that have no intent to progress. It will not • monitor and engage with those that are not be designed as a hurdle to entry for those just starting meeting this standard and delist any that fail to do their responsible investment journey or those who are so over a two-year period; committed but for various reasons are slow to make progress. • delist signatories that contravene the spirit of the Principles. In response to these concerns, the PRI has resolved to work with signatories to develop a criteria and process to define a minimum standard of activity that signatories must achieve in order to remain a signatory. Signatories at risk of delisting will be placed on an internal “watch list” for further engagement by the PRI and will remain on this list for a maximum of two years. The watch list will not be made public. After two years, the signatory will be delisted and their identity publicly disclosed. 28 Steward Redqueen (2016), From Principles to Performance: An independent evaluation of the PRI’s achievements and challenges at 10 Years, (Steward Redqueen, Haarlem, The Netherlands) 24 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 RESPONSIBLE INVESTORS CONVENE AND EDUCATE RESPONSIBLE INVESTORS 25 Connecting signatories with each other and reaching out to potential new ones is central to the work of the PRI – many signatories consider meeting their peers to share knowledge to be a primary reason for joining the PRI community. Our regional networks have been instrumental in promoting and advancing responsible investment around the world. We also provide formal training through the PRI Academy, and we continue to support practitioner-focused academic research. Principle 5 requires that signatories work together to responsible investment and in supporting signatories enhance implementation of the Principles, emphasising and prospective signatories on their responsible the importance of collaboration and knowledge sharing investment journeys. In addition, we have established to the objectives of the PRI. the PRI in Person conference as the largest annual event for the responsible investment community. More Indeed, according to a survey of our signatories, than 1,000 delegates from over 500 organisations networking and knowledge sharing is considered the attended PRI in Person in London in 2015, and the primary role of the PRI by 36% of respondents. We 2016 event in Singapore was our largest ever in Asia. have established regional networks in: the US, Canada, Latin America, Continental Europe, Benelux, Germany/ It is also important for the PRI to reach out to and Austria/Switzerland, France and Southern Europe, support potential signatories who are just beginning to Nordic/CEE/CIS, UK and Ireland, Africa, Japan, China, implement responsible investment. For some potential the rest of Asia and Australasia. signatories, the requirement to report publicly on their responsible investment activities within a year of joining These networks have provided a focal point for the the PRI presents a substantial hurdle. promotion of responsible investment, and have been particularly important in jurisdictions with relatively To help remove this obstacle, the PRI has introduced a small investment management sectors. These new Associate Member category for asset owners new networks have proved invaluable in helping to tailor PRI to responsible investment, with a focus on learning, resources to local markets, co-ordinate engagements development and education. These members will not with local companies, address local regulatory issues, initially be required to report publicly, giving them raise awareness about responsible investment and time to build their responsible investment capacity, recruit new members. The role of the PRI in promoting and removing one of the often-cited barriers to PRI responsible investment, especially in new markets, was membership. recognised in the Steward Redqueen impact evaluation. Associate members will be allowed to remain in this The regional networks also provide the focus for category for a maximum of two years, after which they much of the PRI’s event organisation. In the 10 years must become regular signatories or discontinue their since the PRI was launched, we have organised more membership. than 400 events around the world. These information and networking events play a vital role in promoting 26 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 The PRI Academy, meanwhile, provides CFA-accredited online training in how ESG issues impact company performance, shareholder value and investment decisions. More than 1,500 students have completed online courses through the Academy since its launch, with a satisfaction score in 2016/17 of 94%. In addition, the PRI brings together academics and investors to undertake practitioner-focused research on issues of relevance to responsible investors. We organise events and sponsor original research, as well as working to bring the best insights from existing research to investors in a practical format. We will undertake initiatives through the Blueprint that will: • focus global recruitment on growing the number of asset owner signatories; • reach new markets and institutions, including establishing a strong Asian signatory base, having more signatories in developing markets and achieving penetration rates in North America never previously seen outside Europe; • introduce an Associate Member category for asset owners new to responsible investment – with an emphasis on learning, development and education; • expand the reach of responsible investment training, including the formalised courses provided by the PRI Academy. 27 SUSTAINABLE MARKETS CHALLENGE BARRIERS TO A SUSTAINABLE FINANCIAL SYSTEM 28 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 For investors to fully pursue responsible investing, they need the global financial system in which they operate to be sustainable. The global financial crisis of 2007–2008 gave dramatic and incontrovertible evidence that investors need to play their role in ensuring the stability and sustainability of the financial system on which they rely. We will work on the parts of the system where we can make a difference – beneficiaries; investors; their advisors and service providers; companies and issuers; securities exchanges; regulators – and will monitor environmental, social, technological, economic and political trends that will continue to reshape the financial system as we work. The PRI’s Mission explains why signatories are seeking The next 10 years will therefore see an extension of a more sustainable financial system. It states that: the concept of responsible investment to new areas of “We believe that an economically efficient, sustainable activity – broadening from a focus on the relationship global financial system is a necessity for long-term between investors and investee companies to also value creation.” address the health of the financial system as a whole. We have already established, through consultation with A sustainable financial system is one that is resilient our signatories, that there is a case for the PRI and its and contributes to the needs of society by supporting signatories to participate in public policy, given the role sustainable and equitable economies, while protecting policy plays in regulating and framing relationships the natural environment. It should enable savers to between companies, investors and wider society.29 reliably store and manage their income for future use; enable custodians or trustees to protect and build To build on this work, in 2016 we established our financial value; and enable companies, governments Sustainable Financial System programme to develop and other parties to access capital for investment, a framework for our signatories to begin this effort. Its innovation and consumption. work first involved a review of significant recent reports and research, followed by a signatory consultation to However, it is clear that there are structural barriers build consensus around the purpose of the financial to the global financial system operating efficiently and system, barriers to its sustainability, drivers of change, sustainably. In the wake of the financial crisis, investors risk and sustainability challenges and how to develop need to play their role in ensuring the stability and signatory activities to contribute to a sustainable sustainability of the financial system on which they rely. financial system.30 Excessive leverage, dealing in complex derivatives, and high-frequency trading may benefit some actors in the short-term, but they undermine the resilience of the system as a whole. 29 PRI (2014), The case for investor engagement in public policy, (PRI London) 30 The analysis can be found at here, while the consultation document canbe found here. 29 This work identified nine priority conditions to 6. Principal-agent relationships in the address.31 These are: investment chain can mean that the views of asset owners regarding responsible investment 1. A focus on short-term investment objectives, preferences may not be properly communicated to the detriment of considering longer term risks to companies and other actors in the investment and value creation opportunities. Accountability chain. Too much intermediation can exacerbate and remuneration is also skewed towards short- short-termism, make oversight more challenging, term outcomes. and diversify ownership – all to the detriment of 2. Narrow attention to beneficiary interests, managing ESG issues. often framed purely in near-term financial returns. 7. Cultures of financialisation and rent-seeking Beneficiaries’ interest in financial returns relates in market actors. A financialised system is to the usefulness of their savings in the future. one in which the primary emphasis is on issues If the future is severely resource-constrained, that can be captured or measured in financial inequitable and insecure, beneficiaries are unlikely terms – and which therefore struggles to properly to receive the intended benefits of their savings. account for wider ESG or ethical considerations. 3. Unintended or ineffective policy maker Rent seeking, or the attempt to extract financial influence on markets. Finance ministries often value without adding value, is not an inevitable have limited understanding or concern about consequence of financialisation, but it is closely ESG issues, while policy makers outside finance related. ministries often have limited understanding of 8. The misalignment of investment incentives how financial markets work. This can lead to poor and sustainable economic development. policy making relating to responsible investment. A failure to properly value public goods and 4. Capture of government policy by vested externalities can incentivise investors to invest interests, preventing effective policy on ESG in areas that are harmful to society and/or the issues, such as climate change, labour standards, environment. corruption and tax, that are fundamental to 9. Investor processes, practices, capacities and the ability of investors to generate long-term competencies that flow from an investor’s beliefs investment returns. and values set a framework for the priorities and 5. Influence of brokers, rating agencies, outcomes of investment activity. If these do not advisors and consultants on investment signal that responsible investment is a priority, decisions. Many institutional investors rely heavily it will not be treated as such by consultants, on their consultants and advisors. However, the investment managers, investee companies, trustee latters’ business models often focus on short-term boards, etc. financial performance, meaning they downplay longer-term ESG issues. 31 PRI (2016), Sustainable financial system: nine priority conditions to address, (PRI, London) PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 Addressing these issues calls for investor action to We are cognisant that the world – and the financial tackle obstacles that lie within market practices, system – is not static and will continue to evolve. Our structures and regulation. These actions go beyond the work and the projects we undertake will also evolve realm of ESG incorporation or active ownership. over the course of the Blueprint. We will monitor the drivers of change in the financial system and adapt the It is important that the PRI works in parts of the programme accordingly.32 system where it can make a difference, namely with: beneficiaries (e.g. savers, insurance policy Our work programme is ambitious and is a major holders); asset owners (e.g. pension funds, (re) undertaking for the PRI. It also comes at a time when insurers); investment managers, advisors and service technology disruption and a wide reform movement are providers (e.g. investment consultants, rating agencies, starting to reshape the financial system. We will need investment banks); and companies and issuers, to work with our signatories and other organisations to securities exchanges and related regulators/regulations. support system change and to realise our Mission. Following this consultation, the PRI proposed an initial We will undertake initiatives through the set of projects addressing: Blueprint that will: • asset consulting services; • address key obstacles to creating the sustainable • trustee readiness for a sustainable system; financial system that long-term investment performance requires; • macro risks - investor response to threats and instability; • champion changes to the financial system’s structure that would promote long-term investing; • sustainable system linkages and the role of actors; • target behaviours, practices and incentives within • sustainable finance instruments and incentives; the financial system that create short-termism. • governments linking financial and sustainability policy; • banking sector sustainability review; • ESG investment/modern portfolio theory. These projects will begin to bridge the gap between how the financial system currently works and how a sustainable system should operate. 32 Drivers of change were described in the Sustainable System, Principles, Impact consultation report and Supplementary Document in May 2016. 31 SUSTAINABLE MARKETS DRIVE MEANINGFUL DATA THROUGHOUT MARKETS 32 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 Reliable, timely information is needed for beneficiaries to understand and influence their investments, for asset owners to monitor their managers and for investment managers to accurately price assets and assess risk. That this includes information on material ESG issues is fundamental to responsible investment, but opinions vary on what ESG data companies should disclose and investors should report and how, making analysis difficult. As beneficiary and asset owner demands change, investment managers will increasingly have to share information on any screening they have applied to the pool of securities considered and how they are integrating material ESG issues into their analysis. Asset owners and investment managers will both need to better demonstrate what the impact of their investment decisions has been in the real world. Financial markets rely on accurate information to allow ESG data on thousands of companies. Almost 6,000 investors to properly price assets and assess risk. It companies currently disclose environmental information is a fundamental of responsible investment that such to CDP (formerly the Carbon Disclosure Project). disclosure extends to material ESG metrics; Principle 3 commits signatories to seek appropriate disclosure on Securities regulators and stock exchanges are ESG issues by entities in which they invest. increasingly mandating disclosure. The Sustainable Stock Exchanges (SSE) Initiative, co-founded by the PRI In addition to corporate ESG disclosure, we recognise in collaboration with UNCTAD, the UN Global Compact, that transparency must apply along the investment and the UNEP Finance Initiative, reports that 12 stock chain, beginning with signals from beneficiaries to exchanges incorporate ESG disclosure requirements in asset owners, in turn to asset managers and down their listing rules, 15 provide formal guidance to issuers to the investment vehicle-level. For asset owners on ESG reporting and another 23 have committed to do and investment managers, there is a need to better so.33 As of July 2017, 64 exchanges, representing more demonstrate impacts and outcomes of their responsible than 70% of global listed equity market capitalisation, investment activities. were SSE partners.34 In terms of corporate reporting, enormous progress has Despite this progress, challenges remain. There is been made in the provision of ESG-related information. no consensus as to exactly what ESG data should be According to the Corporate Register database, almost disclosed, or how it should be disclosed. This creates 13,000 organisations have voluntarily produced obstacles for investors and service providers to corporate responsibility reports. Information providers effectively analyse this data. such as Bloomberg, Thomson Reuters and MSCI track 33 2016 Report on progress, Sustainable Stock Exchanges Initiative, 2016 34 UNCTAD presets SSE at United Nations Partnership Exchange, (July 17, 2017), retrieved from http://www.sseinitiative.org/home-slider/unctad-presents-sse-at-united- nations-partnership-exchange/ 33 Needs around transparency and disclosure vary across In addition, we would like to see a reversal of the different styles of investors. Differences in investment proliferation of reporting standards and regimes: the processes drive some investors to a preference for Task Force estimated that more than 400 climate or standardised and comparable data across industries sustainability disclosure regimes exist. Instead, there and companies, and others to a preference for needs to be an alignment of reporting frameworks customised data specific to a certain company. to ensure that companies and other issuers produce comparable ESG data that meets global standards, The PRI will seek ways to improve and standardise and we believe the PRI is well positioned to drive this disclosure from listed companies across these styles, alignment on behalf of investors. acting in close collaboration with other investor organisations, companies and reporting standard For asset owners and investment managers, setters. Similar initiatives will be undertaken for other meanwhile, there is a need to more consistently asset classes. disclose how they screen potential investments regarding ESG issues, and how they integrate ESG One of these is the work of the Task Force on Climate- issues into their investment analysis. related Financial Disclosures (TCFD), established by the Financial Stability Board with a mandate to promote Investors should also seek to demonstrate impacts and voluntary disclosure of climate change issues. The PRI outcomes of their responsible investment activities. has provided input to the TCFD’s work. The responses to our consultation showed a clear preference for allowing flexible reporting (as opposed In final recommendations published in June 2017, to promoting a one-size-fits-all approach). Signatories the Task Force sets out how organisations across all also expressed opposition to additional mandatory sectors and jurisdictions might produce consistent reporting, but supported the provision of a database to climate-related financial disclosures of use to which signatories could voluntarily submit specific data. investors, lenders, and insurance underwriters in understanding material risks.35 The PRI will align with The logical next step for the PRI will be to look the recommendations from the Task Force as a first towards investors’ impact and outcomes, as a step towards measuring impact. contribution towards our Mission. The current Reporting Framework, while comprehensive, focuses primarily The increased use of ESG information by investors on the processes in place to implement responsible will drive improvements in how that data is collected investment policies and activities. It is a long-term from companies and used, marking a shift towards goal that the Reporting Framework will be developed integrated outcomes. Given the PRI’s focus on to allow us to better measure the contribution incorporating ESG factors into investment management, that responsible investment has to tangible ESG we see clear advantages in encouraging companies improvements. to disclose material financial and ESG performance information in the same place. 35 Task Force on Climate-Related Finance Disclosures (2017) Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD, London). 34 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 The PRI has been instrumental in facilitating disclosure We will undertake initiatives through the among our asset owners and investment managers. Blueprint that will: In 2006, only a handful reported publicly on their responsible investment activities. In 2016, over • advocate for meaningful, forward-looking and 1,000 PRI signatories produced publicly available globally comparable company disclosure and Transparency Reports through the PRI. These reports investor reporting; help to communicate expectations from asset owners • promote the inclusion of material ESG information to managers, and for managers to demonstrate their alongside other financial data; responsible investment activities. The 2017 launch of • encourage consolidation of reporting standards and our Data Portal has enhanced asset owners’ access to regimes; investment managers’ reporting data, facilitating better dialogue – a crucial step on a longer journey. • seek to understand and overcome situations where available data is not being used effectively; As asset owner demands are changing, transparency • develop the PRI Reporting Framework to measure and disclosure by investment managers will the contribution that responsible investment makes increasingly have to contain information on the to tangible ESG improvements in the real world; investable universe (or applied screening), the • enhance the PRI Data Portal, empowering processes and practices of integration of material ESG asset owners to assess investment managers’ issues (fundamental integration), and the contributions responsible investment activity. their investments make to a more sustainable society (outcomes, real-world influence and the SDGs). As with corporate disclosure, we will do more over the next decade to streamline and consolidate reporting by investors. Global standards are needed to encourage the production of comparable data, including on impacts and outcomes, as well as ESG risks and opportunities, and the PRI will play a role in the standardisation and integration of ESG reporting and traditional financial reporting. Ultimately, adequate disclosure on responsible investment, incorporation of ESG factors and outcomes to society should be part of mainstream reporting by all financial institutions who manage other people’s money. 35 A PROSPEROUS WORLD FOR ALL CHAMPION CLIMATE ACTION 36 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 It is in signatories’ interests that global warming is limited in line with the Paris Agreement: well within 2°C of pre-industrial levels, with an aim of 1.5°C. Investors’ interpretations of what this means for their investment activities will vary, but ambitious action will be required to protect portfolios from risks and to expose them to opportunities in the shift to a low- carbon global economy In surveys of our signatory base, investors have diversified portfolios across asset classes, sectors and repeatedly identified climate change as their highest geographies. The risks are enormous: the Economist priority ESG issue. Similarly, investor interest in Intelligence Unit estimated mean expected losses due understanding, quantifying and managing the to climate change of US$4.2 trillion by 2100 at today’s investment implications of climate change has been prices – equivalent to the value of the entire oil and gas growing strongly. sector.37 The investment case for long-term investors taking The regulatory response to climate change is well action to address climate risk is well rehearsed. The underway. Developed world governments have been Bank of England’s Prudential Regulation Authority imposing a cost on carbon emissions, either through defined three risk factors through which climate taxes or emission trading schemes, since the 1990s. impacts on investors might arise:36 Similarly, they have been incentivising low-carbon technologies, particularly in the energy sector, through • physical risks from weather-related events (e.g. subsidies and tax breaks. In 2015, the landmark floods and storms), including direct impacts, such international Paris Agreement set a goal of limiting as damage to property, and indirect impacts, such warming to no more than 2°C above pre-industrial as disruption of global supply chains or resource levels, and ideally no more than 1.5°C. Countries are scarcity; developing national plans that set out how they intend • transition risks, or the financial risks caused by the to meet their (voluntary) commitments under the transition to a lower-carbon economy, specifically agreement. from the re-pricing of carbon-intensive assets, such as fossil fuel companies and major carbon Regulators are also turning their attention to risks in emitters; the financial markets. In June 2017, the TCFD issued • liability risks faced by insurers and firms subject its final recommendations. Charged with ensuring to claims from those who have suffered loss and transparency around climate risks within financial damage from climate change. markets, it has set out core elements of climate disclosures, which should include scenario modelling and sit within financial reporting. These risks are systemic: they have the potential to affect entire swathes of the economy, making their avoidance difficult for most investors, and impossible for so-called universal owners: those who hold large, 36 Prudential Regulation Authority (2015), The impact of climate change on the UK insurance sector, (Prudential Regulation Authority, London) 37 The Economist Intelligence Unit (2015), The cost of inaction: Recognising the value at risk from climate change (The Economist Intelligence Unit, London) 37 Leading responsible investors are also responding, Later the same year, as the second phase of the including through initiatives undertaken by the PRI. project, the PRI published Developing an asset owner As far back as 2000, the Carbon Disclosure Project climate change strategy, which sets out a pilot (now CDP) brought together institutional investors framework for a step-by-step approach to addressing to pressure large listed companies to disclose their climate change across three main strategies: engage, carbon emissions and provide information about invest and avoid.40 their climate strategies. Other groups such as the Institutional Investors Group on Climate Change, set Climate change features in a wide range of our up in 2001, and Ceres in the US, set up in 1989, run activities, with recent outputs including climate change investor-led campaigns to address climate risk. guides for private equity investors41, a webinar on climate change for fixed income investors, and our In 2014, in the run-up to the Paris talks, the PRI collaboration with think tank Carbon Tracker on the 2° launched the Montreal Climate Pledge, through which of Separation report, which examined which oil and investors commit to measure and publicly disclose gas companies are most exposed to climate risk.42 the carbon footprint of their investment portfolios on an annual basis. In its first two years, more than 120 However, while investors are making progress, it is investors, managing over US$10 trillion, made the still slow. A study published by investment consultant pledge. According to an assessment of its first two Mercer in June 2017 found that only 5% of 1,241 years, 80% had disclosed their carbon footprints, European pension schemes surveyed had considered and 16% had set emissions targets aligned with the the investment risk posed by climate change.43 That goals of the Paris Agreement.38 However, the range of this figure had risen by 25% in one year – from methodologies used, and gaps in the underlying data, 4% of surveyed firms in 2016 – provides some illustrated the challenges faced by investors seeking to encouragement, but clearly the vast majority of manage climate risk. institutional investors have not even begun the process of addressing the issue. The PRI was highly active ahead of the climate talks, working with investors on high-level policy Among those investors who have begun considering engagement with G20 governments, and working with climate change, the response in many cases is, thus our UN Partners on a number of climate initiatives. far, superficial. According to our 2015 signatory survey, measuring a portfolio carbon footprint remains The following year, we launched the PRI Climate the most popular exercise used by PRI signatories to Change Strategy Project. The first phase involved address climate change, and just 11% of asset owners the publication of a discussion paper setting out the and 10% of investment managers have implemented case for asset owner action on climate change, and a climate change-sensitive or -integrated asset providing advice on measuring carbon footprints and allocation strategy. setting emission reduction goals.39 38 Novethic (2016), Montréal Carbon Pledge, accelerating investor climate disclosure (Novethic, Paris) 39 PRI calls on investors to improve their climate reporting and encourage companies to do the same (December 14, 2016) 40 PRI (2015), Developing an asset owner climate change strategy (PRI, London) 41 Updated guide on climate change for private equity investors (June 1, 2016) 42 Carbon Tracker (2017), 2° of Separation (Carbon Tracker, London) 43 Mercer (2017), European Asset Allocation Report 2017. (Mercer, London) 38 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 The PRI will redouble its efforts in this area, and focus In doing this, we will encourage and support investors on its strengths to support signatories on climate and the groups they have established to address change by: climate-related risks and opportunities. We will collaborate with our UN partners, UNEP FI and the UN • Conducting research to inform investor Global Compact, and existing investor initiatives and action, providing signatories with research to networks such as CDP, the Portfolio Decarbonization better inform investment strategies and decisions, Coalition (PDC), Ceres/ the Investor Network on Climate in collaboration with the PRI’s Academic Network Risk, the Institutional Investor Group on Climate Change and other research organisations; and the Investor Group on Climate Change Australia, • Enabling investor disclosure on assessment New Zealand & Asia. and management of climate-related risks and opportunities consistent with the Task Force on We will undertake initiatives through the Climate-related Financial Disclosures. We will Blueprint that will: adjust and align the PRI Reporting Framework with the Task Force’s recommendations, while • work with our UN partners to meet the Paris supporting disclosure in financial filings. Agreement; • Supporting investor assessment of climate- • empower investors to assess how well positioned related risks and opportunities. We will companies, issuers and their portfolios are for a focus on enabling investors to assess how well- just transition to a low-carbon economy; positioned companies, issuers and their portfolios • align the PRI Reporting Framework with the are for the transition to a low-carbon economy, to Financial Stability Board’s Task Force on Climate- better inform investment decision making. related Financial Disclosures; • Convening investor engagement with • convene investor engagement with companies on companies on management of climate-related climate risks and opportunities; risks and opportunities, including corporate climate • encourage investors to make substantial allocations disclosure. to clean assets and technologies; • Encouraging private sector capital allocations • demonstrate the investment implications of national consistent with the Paris Agreement by governments’ climate change goals; supporting investors in understanding the • collaborate with policy makers to address the implications of public policy climate change barriers investors face in scaling up clean goals incorporated in the Paris Agreement and investments. the Sustainable Development Goals, evaluating investment strategies for low-carbon investment, and collaborating with policy makers to address the barriers investors face in scaling up such investments. 39 A PROSPEROUS WORLD FOR ALL ENABLE REAL-WORLD IMPACT ALIGNED WITH THE SDGs 40 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 For us to fully realise our Mission, adoption of the Principles must have an impact on the world in which we live, and contribute to prosperous and inclusive societies for current and future generations. The UN’s 17 Sustainable Development Goals (SDGs) and their targets provide a way for us to measure our real-world impact. They provide an opportunity for responsible investors to demonstrate how their efforts to incorporate issues such as climate change, working conditions and board diversity into their investment approach are contributing to sustainable development. The SDGs also provide investors with a clear vision of how government decision making and company behaviour will shape how the global economy develops over the next 15 years. By setting policy makers’ priorities, the SDGs will be a key driver of global GDP growth and a source of investment opportunities. In addition to risk and return, responsible investment The SDGs were agreed in September 2015 by will increasingly include a third dimension, the real- 193 governments under the auspices of the UN. world influence of investment practices. The Principles Underpinned by 169 individual targets to be met are not an end in themselves, but are a means towards by 2030, they provide a definitive framework for the end of a sustainable global financial system that will sustainable development. They are the result of allow investors to achieve long-term value creation and arguably the most inclusive process carried out by which benefits the environment and society as a whole. the UN, which included the business and investment communities as well as governments and civil society The PRI’s Mission is to support long-term value groups. Unlike their predecessors the Millennium creation by our signatories for their beneficiaries. This Development Goals, they apply to industrialised requires that the responsible investment practices countries as well as the developing world. that the six Principles promote have real-world impact – that is, they lead to measurable improvements in Most PRI signatories expect the SDGs to play an ESG outcomes. Furthermore, the preamble to the six important role in the development of a responsible Principles states: “We recognise that applying these investment agenda for the next decade. They believe Principles may better align investors with broader there is a clear investment case for aligning responsible objectives of society.” investment with the SDGs. For our impact on investors to be meaningful, it needs First, many PRI signatories believe that ultimately to be reflected in their impact on companies and their investments in companies (and other entities) society at large. Identifying and measuring these real- will only be profitable over the long term if societies world impacts is not a straightforward process, but the and the financial system develop in an equitable and 17 SDGs provide a framework against which impact sustainable way. Failing to achieve the SDGs will put might be measured, and offer guidance in defining the value at risk. As well as system-wide sustainability “broader objectives of society” to which our signatories risk, there are specific risks for particular industries, aim to contribute. companies, geographies and countries. 41 These risks may be regulatory, ethical or operational The sums involved are enormous. UNCTAD estimates and are often also financially material. Integrating an that globally, the level of investment needed to achieve SDG risk framework into investment decision-making the SDGs will be between US$5 trillion and US$7 trillion processes is therefore crucial for any responsible per year, on average, over the period 2015-2030. Of investor. this, just US$1 trillion is expected to come from public funds, with the private sector expected to contribute the The SDGs also represent investment opportunity. They remaining US$6 trillion. provide a clear road map for the development of the global economy over the next 15 years that will guide Given the scope of PRI membership, with our decision making and behaviour of both governments signatories representing around one third of global and companies. With governments introducing private capital, meeting the SDGs would require our regulation and incentives to promote the SDGs, and signatories to invest US$2 trillion annually in companies companies globally moving towards more sustainable and other investments that directly contribute to the business practices and innovation in sustainable goals. By 2030, that would represent a cumulative 25% products and services, investors who integrate the of assets under management having a direct positive SDGs in their investment strategies and decisions contribution to the SDGs. are likely to identify well-managed, forward-looking companies, helping them to financially outperform. This is not something to which institutional investors Furthermore, GDP growth is the main structural source will commit easily, especially given the challenges of financial returns. Achieving the SDGs will be a key they face relating to the SDGs. These include a lack of driver of global GDP growth over the next 15 years to clarity around SDG-relevant investment opportunities, 2030. inadequate data, and insufficient company transparency on ESG issues. The current design and operation of the Acting on this investment case will, however, involve financial system does not always provide the necessary a realignment of responsible investment from a focus incentives to encourage investors to work towards the on process – integrating ESG issues into investment SDGs and, in some cases, may even be detrimental. policies, decisions and ownerships – towards an outcome-based approach that explicitly aims to There is, therefore, a clear role for the PRI to help contribute to the sustainability challenges set out by the translate the SDGs into investor action, and helping our SDGs. signatories deliver real-world impact as a consequence. Many investors are keen to grasp the opportunities To do so, the PRI has launched an SDG work presented by the SDGs: according to a recent survey programme. Its first task is to prepare a landscape map of institutional investors, more than four-fifths plan of institutional initiatives towards meeting the SDGs, to engage with investee companies on the SDGs and to ensure that the PRI is not duplicating work that is allocate capital to investments that support the goals.44 being undertaken elsewhere. In doing so, we will work closely with our partners in the UN and with our peer organisations. 44 Investors can play a central role in achieving Sustainable Development Goals (March 21, 2016) 42 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 It will also ensure that work on the SDGs is integrated • Promote improved disclosure on ESG factors into our work on a Sustainable Financial System, and the SDGs by companies and other entities specifically to promote public policy and regulatory (Principle 3), by promoting SDG disclosure, working coherence to attract capital into the SDGs, ensure with peer initiatives such as the Sustainable Stock environmental and social externalities are addressed, Exchanges initiative, the UN Global Compact, and and potentially offer guidance to governments to help the Global Reporting Initiative, and the Sustainable them make their national plans for the SDGs investible. Accounting Standards Board, and by encouraging investors to disclosure around the SDGs. The work programme will also aim to integrate • Provide information on the SDGs to create the SDGs into how signatories implement their awareness, education and promote research commitments under each of the six Principles. Taking (Principle 4) through campaigns, academic each of the Principles in turn, the programme will: research, and by encouraging service providers to explicitly cover the SDGs. • Provide investment practice guidance on how • Define and measure the impact of current PRI to integrate the SDGs in investment strategies, and investor activities in support of the SDGs and policies and investment decisions (Principle 1). communicate publicly about the ways in which the Our new work on investment strategy is already PRI’s current activities support the goals (Principle introducing a shift towards a new approach, adding 6). Among other things, the programme will aim to “real-world impact” as a third dimension that stimulate investor reporting on outcomes relating to should be incorporated into investment strategy, the SDGs by updating our Reporting Framework. alongside risk and return. To further this work, the programme will provide guidance on integrating the SDGs into investment strategy, policy and The PRI work on the SDGs will be supported by an asset allocation, and into mandates and monitoring SDG advisory committee (made up of approximately 20 of investment managers, as well as providing members). The committee will advise the executive and guidance and tools on applying the SDGs to the board on the PRI’s work on the SDGs.45 different asset classes and financial products. • Integrate the SDGs in active ownership and engagement (Principle 2), by ensuring that discussion of the SDGs is included in dialogues between investors and companies. This will involve general guidance on the SDGs in active ownership, using the Collaboration Platform to promote SDG engagements (Principle 5), and defining and measuring PRI and collaborative investor engagements in support of the SDGs. 45 Its terms of reference can be found here. 43 We will undertake initiatives through the Blueprint that will: • work with our UN partners to deliver the SDGs, such as by leveraging UNEP FI’s Principles for Positive Impact Finance and the UN Global Compact’s Ten Principles; • set out steps and develop tools for investors to align their investment activities with the SDGs; • encourage investors to seek, through the full range of active ownership activities, corporate responsibility enhancements that advance the SDGs; • encourage capital towards projects with positive, real-world impact; • introduce the SDGs into the PRI Reporting Framework; • map our work against the SDGs, and report on our contribution towards them; • engage policy makers to encourage public policy that supports the SDGs. 44 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 MEASURING SUCCESS 45 Over the 10-year life of this Blueprint (2017–2027), responsible investors’ actions, the nature of markets and the world we live in will change – with or without our intervention. The most meaningful way to assess our effectiveness will therefore be to create specific and timely measures for the individual projects we initiate within the Blueprint programme. We aspire to be as transparent in our activities, just • investors engaging companies and policy makers as we expect transparency on responsible investment on climate change, using PRI Reporting Framework issues from our signatories. Given the evolving nature data; of financial markets in general, and responsible • alignment of proxy voting with responsible investment practices in particular, it would neither be investment policies, using PRI Reporting practical nor wise to attempt to set specific goals to be Framework data and publicly available data; met at the end of the Blueprint’s envisaged 10-year life. • quantity and quality of ESG reporting using PRI Reporting Framework data; Instead, the PRI will identify metrics that will help us and our signatories measure our progress towards • uptake of responsible investment training using aspects of the goals. We envisage these goals covering national and UN data; areas such as: • engagement activity using PRI Reporting Framework data and PRI Collaboration Portal data; • our growth among asset owners, particularly in • quality of investor ESG reporting using PRI under-represented markets; Reporting Framework data; and • our work towards the SDGs, using national and UN • quantity and quality of corporate ESG reporting, data; using Sustainable Stock Exchanges data and • signatories’ contributions towards meeting publicly available data. the SDGs, using capital flow and corporate responsibility data; We will undertake initiatives through the • asset owners’ assessment of investment Blueprint that will: managers’ responsible investment capabilities, using PRI Data Portal data; • be transparent in measuring the implementation of our 10-year ambitions; • investor support for clean assets and technologies, using capital flow data; • outline, in the three-year strategies that will underpin this vision, the key performance indicators • the depth and breadth of responsible investment (KPIs) that we will measure our progress against; throughout organisations, using PRI Reporting Framework data; • report annually against the KPIs active in any given year, throughout the life of the Blueprint; • the characteristics of the financial system, using systems analysis and signatory implementation of • monitor developments such as technological recommendations; disruption, market shocks and changing regulation that could impact our work as the Blueprint • the depth and breadth of responsible investment unfolds; throughout organisations, using PRI Reporting Framework data; • report publicly, as our signatories do. 46 PRI’S BLUEPRINT: GENESIS, ASSUMPTIONS AND PROCESS | 2017 The Blueprint sets out an ambitious agenda for the next What is clear is that the social and environmental 10 years. The next steps will involve the PRI drawing challenges facing our signatories, the wider investment up the first of a series of three-year strategies that will community, and humankind as a whole are, if anything, implement the agenda. As part of this process, we will more pressing than when the PRI was launched 10 continue the extensive consultation with our signatories years ago. Then, the adoption of our six Principles that we have undertaken to reach this point with the by investors was an aspirational goal. Now, we Blueprint. We welcome continuing input to shape the need to move beyond adoption, to outcome; from evolution of the Blueprint and our three-year strategies, implementation, to impact. and how we progress towards achieving our Mission. Ultimately, the success of the PRI will not be measured We are cognisant that delivering the fundamental goal by our number of signatories, nor by their assets under of a sustainable financial system, and the benefits management, important as those metrics are: it will be that flow from that, is beyond any one organisation. measured by our ability to build a financial system that Much of the progress we can make towards that goal supports the society and the environment in which we will depend on the actions of our signatories, and want to live, and pass on to future generations. our success in convening, supporting, and facilitating them in their efforts. Similarly, much of our success will depend on the degree to which we are able to efficiently provide our signatories and their trustees with the information and resources they need to embrace responsible investment practice. We are also aware that external drivers of change, such as technological disruption, market shocks, changing regulation and the erosion of trust in the financial system, might prevent us from achieving the goals of the Blueprint. We will monitor these drivers as the Blueprint unfolds. 47 Principles for Responsible Investment 5th Floor, 25 Camperdown Street, London, E1 8DZ, UK T: +44 (0) 20 3714 3141 PRI Association (Hong Kong) Limited Level 9 Central Building, 1–3 Pedder Street, Central Hong Kong T: +852 3958 2946 PRI US, Inc. 45 Rockefeller Plaza, Suite 2000 New York, NY 10111 T: +212 332 3437 info@unpri.org - www.unpri.org THE PRI is an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact