Sustainable Investment in China | Principle 4: Promoting the Principles within the Investment Industry

The UN Principles for Responsible Investment (PRI) were designed as a framework for the whole investment industry, and Principle 4, “We will promote acceptance and implementation of the Principles,” asks signatories to advance responsible investment throughout the investment decision-making chain. According to our 2010 survey of 430 global investors, 70 percent include ESG considerations in their recruitment of third-party providers, and 50 percent incorporate them into contractual agreements.

One reason for the PRI’s growth is the committed network of asset owners incorporating responsible investment into their mandates with asset managers. Sixty-six percent of asset owners put specific ESG considerations into their contracts with managers, and an impressive 85 percent were involved in dialogue with regulators on ESG issues.

The French asset owner Fonds de Réserve pour les Retraites (FRR), for example, incorporates the PRI and ESG-related considerations into their selection processes for both passive and active mainstream equity managers. ESG issues are addressed in both first- and second-round questionnaires, with varying weights applied depending on the evaluation criteria. FRR’s managers are required also to vote and assist in engaging with companies (PRI Principle 2).

However, promoting responsible investment still remains a challenge for many investors. There are myths surrounding what responsible investment means and confusion about its impact. Some see responsible investment as being about “negative screening,” or not investing in a company because of a poor sustainability score. Rather, responsible investment is about expanding the investment universe through the inclusion of ESG data to better understand and evaluate a prospective investment.

Further, most investment decision-making relies, to some extent, on sell-side research providers for information. If sell-side research providers—and likewise credit rating agencies—take ESG issues into account where they are material, so too will mainstream investment decision-makers. However, there are too few incentives for research providers and brokers to address better ESG issues in their research. Only 50 percent of investment managers and 25 percent of asset owners provide financial incentives, for example.

Another challenge is that geographically, the majority of Principle 4’s implementation is occurring in Europe, the Americas and Australasia, and to a much lesser extent (35 percent) in Asia. With 850 signatories and combined assets under management of US$25 trillion, UN PRI members are demonstrating that ESG issues are important and have a material financial impact that needs to be incorporated into their strategies and investments. Asian investors too will need to make responsible investment a core component of their activities. Those that do will be the leading investors of tomorrow by being better prepared for emerging risks and opportunities.

For more information, please contact Joshua Kendall at joshua.kendall@unpri.org