One indication of just how far the attitudes to ESG issues have shifted in the last decade is the remarkable growth of the UN-supported Principles for Responsible Investment. The PRI now has more than 1,800 signatories worldwide, with private equity firms the largest group of single asset managers. But there’s plenty of work still to be done, says managing director Fiona Reynolds, who says the PRI is prepared to delist up to 200 signatories that have failed to incorporate the principles into their investment decisions.
The PRI is more than 10 years old. What’s your biggest achievement in this time?
Over the last decade, the PRI has really helped to raise awareness of how important it is to look at investments in a more holistic way, so not just looking at financial data in isolation but also considering the financial impact of environmental, social and governance issues. We are pleased this message is finally getting across to many investors and that their knowledge and understanding of ESG factors has become more sophisticated over the last several years.
You have threatened to delist signatories that don’t meet your minimum standards. How will this work?
We have now established a minimum criteria for progress on integrating the PRI principles, which all signatories will need to meet. Signatories at risk – we think there are about 200 – will be placed on a watch list (not public). The PRI will then work with these members over a two-year period to try and effect improvement. If after that time, they still are not meeting the minimum criteria, they will be delisted. They can appeal the decision to the PRI board, which is overseeing the delisting model. At the same time, we will be putting together a leadership report to highlight signatories with best practice at integrating the principles.
Are there any disappointments or areas where you have failed to make the progress you hoped for?
Despite our efforts and the efforts of other organisations and academics in showing the positive impact looking at ESG can have in terms of better managing risk and identifying new opportunities, it is disappointing to see that some investors are still sceptical of ESG. It is also disappointing to see that many large fund managers are not supporting activities such as climate disclosure resolutions in their organisations.
How important is the private equity industry to PRI’s agenda?
We have experienced an enormous amount of goodwill from both LP and GP signatories, who use the PRI as a platform to work towards an alignment of expectations and to understand best practice as it evolves. Private equity managers represent our largest group of single asset managers that are signed up to the PRI, and we have some of the largest LPs in the sector active on our programme (ie, CPPIB, CalPERS, APG and OTPP). We also enjoy very fruitful partnerships with the most influential industry associations who are spearheading responsible investment initiatives in response to member demand. The influence this is having on the private equity industry is transformative.
What’s the biggest driver of responsible investment now?
Following the financial crisis, investors and financial institutions have been under increased pressure from stakeholders and regulators to demonstrate their commitment to more sustainable investment practices. Long-term institutional investors are also increasingly concerned by new financial risks linked to the transition to a low carbon economy, such as stranded assets for fossil fuel and, more particularly, the coal sector. Finally, there is now greater awareness of fiduciary duty and the need to act in the best interest of beneficiaries. GPs have historically looked at ESG risks in their investments, but they are responding to LP pressure to demonstrate how they are doing this in a systematic way and with accountability.
Reynolds has overall responsibility for the PRI’s operations globally and has more than 20 years’ experience in the pension sector. Prior to joining the PRI she spent seven years as chief executive at the Australian Institute of Superannuation Trustees.