The last thing corporate social responsibility needs is a new acronym.
That said, the Principles for Responsible Investment – PRI for short –
launched last month in New York (see page one) are a massive boost for
sustainable investment. A group of the world’s largest institutional
investors, principally pension funds, has agreed to follow a set of
common guidelines when they assess social, environmental and governance
risks and opportunities, and to apply these principles to all
investment functions – not just their socially responsible investment
products.
The principles fit the prevailing mood, providing investors with a
framework in which to take a long-term view of a company’s prospects,
but still leave room for manoeuvre: under their comply-or-explain
approach, institutional investors can choose how to put the six
principles into practice, reporting how they do this while providing an
explanation where they do not comply. This minimizes the compliance
burden. The principles also reaffirm the primacy of fiduciary
responsibility, declaring that because environmental, social and
governance issues can affect investment portfolio performance,
investors acting in the interest of beneficiaries need to take them
into account.
This is a top-down initiative, with commitment from the institutional
heads. It is top-down in another way too: in the investment industry
food chain, institutional investors are the big beasts. Their embrace
of the principles will prompt investment management companies, analysts
and consultants to develop new products. These in turn will be
repackaged and sold on to other clients, leading to change elsewhere in
the industry. The principles talk coolly of ‘revisiting relationships’
with service providers – a polite way of saying that if the providers
are not up to scratch, they risk losing the business.
Inevitably, there are omissions. Tougher disclosure requirements would
make it easier for third parties, including beneficiaries, to identify
how funds consider environmental, social and governance risks for asset
management purposes.
What are the implications for companies? The principles spell out
‘possible action’ by investors, among them engagement and the exercise
of voting rights. Asking companies to put more non-financial data in
the annual report is a familiar request from SRI investors, but not as
a mainstream investment demand. These principles are voluntary,
aspirational and not prescriptive, yet their introduction may be seen
in future years as the tipping point at which the main body of
investors began giving serious consideration to environmental, social
and governance issues.
