United Nations’ Principles for Responsible Investment (PRI) has helped to transform the investment community’s attitude to responsible investing, but it next needs to get its signatories to prioritise the social characteristics of companies and economies with the same urgency they now target climate change.
That is the view of Fiona Reynolds, the departing chief executive of the non-governmental institution.
Reynolds, who will step down at the beginning of 2022 to return to her native Australia, has presided over a period of massive expansion for PRI. When she took over the reins in 2013 it was an organisation of 37 staff and 1,000 signatories; today it has close to 180 employees and over 4,000 today, 626 of which are asset owners.
The signatories represent a combined $103.4 trillion in assets as of the end of March.
Moreover, becoming a PRI signatory has become a kitemark of investor commitment to environmental, social and governance (ESG) principles.
Reynolds says the mentality around responsible investing has utterly transformed over the past eight years.
“When I started working (at PRI) people really saw responsible investing as a fringe mission and didn’t consider it to be a mainstream investment issue,” she told AsianInvestor. “We were constantly having to debate why ESG issues should be considered in the investing process.
“Today that is accepted as a mainstream issue. Is it completely embedded in everybody’s investing process? No. But you do not need to have arguments about it anymore.”
She readily admits that PRI is not solely responsible for the mainstream embrace of ESG or the rising emphasis on climate change. However, she says it has helped evolve it from being focused on listed equities.
“PRI helped to develop best practice across all asset classes, to embed responsible investing in private equity as well as listed equity for example.”
"Of course, more still needs to be done, especially in Asia - a region that is still very patchy in its application of ESG principles, from governments down to investors.
“Asia needs to step up and do more,” said Reynolds. “It’s a big place with (some) very developed economies and some developing. I think the developed need to step up and integrate factors. Their governments could do more as well.”
She points to Japan as one nation that is progressing. “I was pleased to see developments in Japan over the years, and it has at least set net zero target for 2050, but lots of governments aren’t, and other governments, like Japan’s, still need to do more.”
SUSTAINABLE SUCCESS NEEDED
Asked what PRI’s next strategic objective should be, Reynolds is unequivocal: “[Investors have] fallen short around social issues.
“There is an S in ESG, and it is completely overshadowed by the environment and climate issues, while people started thinking about governance in the early days of responsible investing.”
She believes her successor, who has yet to be found and named, should help to fight for a more measurable process that includes human capital into investing methods.
“We need to develop norms of human capital, diversity and ... inclusion and investors need to step up their engagement and embed human rights into investment processes. Today not enough investors do (and) only a couple of hundred do it well.”
Covid-19 may have helped hone the argument for the importance of ‘S’ factors. The pandemic has shone a light on the essentialness of many manual workers. She hopes that real progress can be made on this issue, ideally through a systematic approach and prioritisation.
“I hope in a five-year period, if not sooner, human rights will be like climate issues, with every signatory doing something [to measure and consider them].”
She added, “what I would like to see is that governments also look more to social issues, while investors need to get good reporting and data on them. I’ve never understood why people ignore people.”
One reason seems quite evident: out of sight, out of mind.
The biggest social problems tend to exist in non-developed market economies. These destinations are not typically the headquarters of large fund managers, but are set to attract more fund flows as asset owners and fund houses alike seek better returns.
IN DEFENCE OF DEMOCRACY
China offers the thorniest example.
The country continues to be dogged by allegations that thousands of its Uyghur minority population work in forced labour conditions, which led the US Senate to pass a bill on July 16 that would prevent any goods produced from this source into the country. Plus, freedom of expression and speech are severely curtailed in China, and independent labour unions are banned.
Yet it is also the world’s second-largest economy, and fast-growing.
Many other developing countries face similar social-related concerns, ranging from increasing nationalism, Covid-19 cases and concerns of religious intolerance by India's Hindu-dominated government to the mounting pandemic death-toll in Brazil, a consequence in large part of president Jair Bolsonaro's ongoing refusal to implement measures to combat the disease. Corruption is also a wide-spanning issue.
Reynolds does not target any specific country when discussing how investors should consider the confluence of ESG and political risk. However, she believes that “investors could become more involved, talking more about [the risks of] political uncertainty and talking more … about democracy’s role in good governance and upholding good values.
“Investors could think when [investing] that sovereign risk and the rule of law are important [to consider]. And, depending on where the world is headed, they can step up more with their voices.”
As ESG continues to evolve into the future, PRI will need to find a way to help investors better influence economies with governments that may at times make a show of their indifference to ESG targets.
It will also need to help them hone their attention in an area that continues to evolve.
“The list of things that investors need to do is endless,” admitted Reynolds. “At the end of the day, they have to look at what materials they can get and how best to focus their time. One of the biggest systemic issues the world faces [in ESG] is the need to have priorities.”