The world is on fire – literally and metaphorically – as well as being flooded and assailed by storms. The Los Angeles fires and Storm Éowyn being just two recent examples, it is clear that natural disasters and extreme weather events are much more frequent than before, with Oxfam reporting that the number of climate-related disasters has tripled in the past 30 years.
While finance and the environment may not initially seem to go hand in hand, how capital is invested can have a big impact on the planet – so much so that the UN has created a proposal to support those managing money to do so more ethically and sustainably.
The six Principles for Responsible Investment (PRI) were defined under a United Nations-supported initiative. They offer a menu of possible actions for incorporating environmental, social and governance (ESG) issues into investment practice; it is hoped that upon adoption by industry these will mitigate some of the negative effects less sustainable practices have had.
The principles were established by a global group of institutional investors – designed “by investors, for investors”, says Fabiola Schneider, assistant professor in accounting and Ad Astra Fellow at UCD.
“Initiated by the UN secretary general in 2005, the PRI aims to foster a more sustainable global financial system by encouraging signatories to integrate ESG considerations into their investment practices,” says Schneider.
“The principles draw on and complement other key initiatives, including the UN Global Compact and the Global Reporting Initiative.”
The principles range from decision making and practices to seeking and providing disclosures, and take in collaboration on and promotion of the initiative itself. They are:
- To incorporate ESG issues into investment analysis and decision-making processes;
- To be active owners who incorporate ESG issues into their active ownership and policies and practices;
- To seek appropriate disclosure on ESG issues from the entities in which investment is made;
- To promote acceptance and implementation of the principles within the investment industry;
- To work together to enhance effectiveness in implementing the principles;
- To report on activities and progress towards the implementation of the principles.
The UN PRI is a voluntary initiative, says Schneider: “It is a global initiative; therefore, signatories are not subject to the laws of just one jurisdiction. Certain actions which the UN PRI promotes, such as ESG disclosures, are mandated in certain jurisdictions such as the EU.”
Implementation of the principles requires asset managers to have policies in place indicating how they will work towards implementing them, says Deirdre Timmons, sustainable finance lead, ESG reporting and assurance, PwC Ireland.
“This would then be backed up with procedures regarding how the principles will be taken into account in the investment analysis and decision-making processes,” says Timmons. “Once invested in an entity, then ongoing engagement and active ownership are required to demonstrate stewardship in line with the principles. And, finally, there should be transparency by reporting on the actions taken towards the principles.”
There is no strict mandatory requirement for an asset manager to either sign the principles or implement them. However, many investors will require this and will also monitor the annual reports of the managers in question when seeking managers for their funds, says Timmons.
“Many mandates given to asset managers will require strict adherence and a clear demonstration of that. In many cases, a failure to do so would mean losing that mandate, so it is an incentive to comply.”
As signatory recruitment approaches saturation point in some of the most mature responsible investment markets, global growth in support for the UN PRI is levelling off after a period of rapid expansion over the past two decades, says Schneider.
“By spring 2024, the PRI had over 5,300 signatories, including 4,827 investors and 518 service providers,” she notes. “Total assets under management by signatories remained robust, reaching $128.4 trillion (approximately €122.05 trillion) – up from $121.3 trillion at the end of the previous PRI reporting period in spring 2021.”
With regard to the change in government in the US and the “ESG backlash”, Schneider thinks collaboration and initiatives that bring together actors with overlapping interests are more important than ever.
“Signatories’ responsible investment policies are becoming more comprehensive,” she says. “According to the UN PRI 2024 report, the vast majority of large asset owner signatories are evaluating managers’ incorporation of material ESG factors in the investment process and more than 90 per cent of managers say that material ESG factors contribute to how they select individual assets.”
