The UN's Principles for Responsible Investing (PRI) wants more Asian asset owners to commit to its mission but could also push out up to 100 existing signatories next year when it increases its minimum requirements.
That's the double-edged message from its chief executive Fiona Reynolds.
Speaking to AsianInvestor in London, Reynolds noted that the non-profit organisation, which promotes sustainability among institutional investors and fund managers, has been pushing hard in the Asia-Pacific region where it has built up a presence and is set to add more resources.
“It’s been a concerted effort for us in Asia and now we have more staff on the ground and in China,” she said.
PRI added Nan Luo as head of China in 2017, while James Robertson was made head of Asia (ex-China and Japan) in April 2018. It also appointed Aiwen Zhou in July as a climate analyst alongside Luo, hiring her from United Nations where she had been an environmental sustainability intern based in New York. It also moved Matt McAdam from his role as head of Australasia to become director for Asia Pacific in February 2019. Further appointments are planned.
The increased resources have helped encourage more asset owners to join. Thailand’s Government Pension Fund signed up in December 2018, while Hong Kong-headquartered regional insurer AIA did so this March, with Malaysia’ Employees Provident Fund following in April. Ping An Insurance then became the first Chinese asset owner to join PRI on August 23, to be followed less than a week later by the Hong Kong Monetary Authority.
Asset owners and fund managers that sign up to PRI declare a commitment to include environmental, social and governance (ESG) factors in their investment decisions. These include environmental standards, workers’ rights and conditions, board diversity, executive pay and voting rights. The broad idea is to both encourage responsible corporate actions and, potentially, benefit from investing in companies that are less prone to inefficiency, scandal or corruption.
Asia Pacific-based investors posted the biggest regional jump in signatories in 2018, Reynolds said. That said, just 76 of the PRI's total of 477 registered asset owner signatories hail from the Asia Pacific and most are from Australasia.
“We have only just scratched the surface [of Asia Pacific signatories] and that’s why we have put more people on the ground,” said Reynolds. “We need not just a bigger presence in the region but to involve ourselves in the things that are happening there.”
In addition to seeking more signatories from China, PRI is also looking to build its presence and involvement in India, another major economy that has yet to see an asset owner signatory.
“We are doing exploration in India, seeing what if any responsible investment angles are there and we are thinking about the future,” Reynolds said.
APPLYING MINIMUM STANDARDS
One factor behind PRI’s growth has been a growing acceptance of the need to combat climate change, particularly following the Paris Climate Agreement of 2015 that aims to keep global warming below a 2 degrees centigrade rise.
With recent news including stories about massive forest fires in California and an unseasonal typhoon wreaking havoc in Japan, fears are growing about the potential costs of global warming. Those concerns have put both customer and regulatory pressure on fund managers and asset owners alike to take the threat more seriously.
Increasingly, members from both groups have seen signing up to PRI as a helpful symbol of their commitment to ESG and sustainability.
But there's a big difference between talking the talk and walking the walk. So the PRI is wary of organisations that might sign up to its principles without doing the hard yards to introduce ESG concepts into their investment processes.
To help combat such ‘greenwashing’, PRI introduced minimum standards for its signatories in 2018 and gave them a deadline of two years to hit them.
“I would say the [threat of organisations misusing PRI signatory status as a sign of accreditation] has happened and that’s why we are introducing a minimum standard for public reporting,” she said. “We are also in the process of reviewing the reporting framework.”
“We have got 100 [signatories] on a watchlist who are not meeting the standard,” Reynolds said. PRI is working with these companies, some of which are based in Asia, to improve their ESG game to what is required – and if they don't, they'll be out, she said, potentially incurring some negative publicity in the process.
“We will continue to [assess the minimum standard adherence] every year from now; we will clean up the bottom and those that do nothing we want … [will be] gone,” Reynolds said.
It will be a carrot-and-stick approach, with the PRI also highlighting its leaders after each review. “This [coming] year we will focus on asset owners and next year we will include asset owners and lead asset managers across different asset classes. I hope that will showcase those that are doing best in certain areas,” she said.
That’s not the end of it.
“After that we will review the minimum standards and increase them, or review them to be increased,” Reynolds said.
How much the criteria is tightened has not yet been decided, in part because PRI wants to be a relatively broad church in terms of its membership.
“We have funds for whom this is all new on the one hand, versus others that have been doing this for 20 years and have great experience and depth,” Reynolds noted. “We need to make the criteria in a way so that we don’t put people off from getting started because the bar is so high.”
Fund managers that AsianInvestor spoke to queried whether PRI should tier its signatory statuses, to recognise fund houses and asset owners that are particularly advanced or committed in their ESG engagement. Reynolds demurred, arguing that the agency already does this to some extent.
“We will benchmark you across like-for-like organisations and take that into consideration, instead of comparing you against organisations that are 10 times bigger or doing ESG a lot longer,” she said.
The PRI’s next annual meeting is being held in Tokyo in September 2020. Reynolds hopes the event surrounding the meeting will further build its regional appeal.
“We will hopefully build momentum and get more people in the region interested in responsible investment,” she said.