Transparency under the spotlight
The mandatory reporting regime of the UN Principles for Responsible Investment has caused controversy. But advocates say it will shine a light on ESG integration. Mark Nicholls reports
From October 2013, more than 1,000 asset owners and investment managers, managing some €26trn of assets, will begin the largest exercise yet in responsible investment (RI) disclosure. Over the following six months, these signatories to the Principles for Responsible Investment (PRI) will report on how they are implementing their RI strategies – and a large part of the information they disclose will be made public.
“Transparency has always been an important part of being a PRI signatory,” says James Gifford, the initiative’s London-based executive director. “But the old [PRI reporting] framework was based on self-assessment,” he adds, which made it hard for signatories to compare themselves with the wider market – and for the PRI to measure its impact.
In response, the PRI secretariat has spent the past two years developing a methodology that will allow for a more objective analysis of the progress its signatories are making in implementing responsible investment.
Founded in 2006 by the UN Environment Programme Finance initiative and the UN Global Compact, the PRI consists of six principles. They address things like the integration of environmental, social and governance (ESG) issues into the investment process, active ownership on ESG factors, and corporate ESG disclosure.
The sixth principle commits signatories to “report on… activities and progress towards implementing the Principles”. While it has always been mandatory to report to the PRI, disclosing that information publicly was voluntary – with less than half of signatories choosing to do so.
Moreover, the earlier reporting process – which the PRI described as a ‘survey’ – was organised by principle, rather than by type of investment business, and required interpretation by signatories. “There were vast differences in signatories’ own interpretations” of the degree to which they were implementing the principles, says Gifford.
Now, in addition to general sections about signatories’ organisational structure and approach to RI, they will be required to report against asset classes, with different modules for direct and indirect investments – assuming they have at least 10% of their assets in any one module. This will fit better with how signatories invest, and is intended to reduce the burden on smaller funds and managers.
Among other disclosures, signatories will be asked the percentages of their assets that are managed using ESG strategies, and the number of corporate engagements they were involved in. For indirect investments, questions will revolve around how asset owners assess their managers’ ESG credentials during selection and assessment.
“The primary output will be indicators, like the GRI,” says Gifford, referring to the Global Reporting initiative, which is the benchmark for corporate reporting of non-financial data. These indicators will allow “the reader – which might be the client, beneficiaries or internal stakeholders – to decide the extent to which [the signatory] has integrated ESG issues”.
This year and next, the PRI is piloting an assessment tool that will generate a confidential report for signatories, allowing them to benchmark their progress against the wider market.
“The market as a whole is asking for evidence about responsible investment – that the commitments signatories have taken on actually mean something, and are about outcomes, not just processes,” says Rob Lake, a former director of responsible investment at the PRI, and now an independent adviser. However, given the diversity of responsible investment practice, “the challenge has been coming up with questions that reflect that diversity but also allow for commonality and comparability”, he adds.
Indeed, the PRI didn’t get it right first time. A pilot draft – released last year – met with significant pushback from signatories, with some complaints centred on the perceived prescriptiveness of the original questions. “A number were worded or structured so as to assume that, as a responsible investor, you structured yourself a particular way,” says Tim Macready, chief investment officer at Christian Super, a A$720m (€502bn) Australian pension fund provider.
Macready and others were also concerned about the extent of the reporting required. “We had concerns about the amount of detail required,” says Tim van der Weide, responsible investment adviser at Dutch asset manager PGGM, the €140bn provider for the Dutch healthcare pension fund PFZW.
In response, the PRI secretariat delayed adopting the new methodology, and carried out extensive consultation. “The PRI has put a vast amount of time and effort into the discussion with signatories, especially asset owners,” says Lake. “And the asset owners, particularly the larger ones, have been some of the most engaged in the discussion. There’s been huge commitment on their part in getting the reporting framework right.”
“The PRI has a difficult job,” says Elliot Frankal, who advises investors on ESG reporting.
“It needs to find a balance between a framework that gives a genuine insight into how signatories are implementing responsible investment, which can highlight who the leaders and laggards are, and which stays on the right side of client confidentiality.”
The revised methodology “strikes about the right balance,” he says. “Although only time will tell.” Indeed, Lake argues that “if everything works smoothly for every signatory, it would probably mean that something’s wrong”.
Gifford acknowledges that the reporting process will require some time and effort from signatories – perhaps “a few days a year”. But he adds: The ones who are serious about responsible investment will recognise that this is a powerful learning tool.”
Indeed, Jon Duncan, head of sustainability research and engagement at South Africa’s Old Mutual Investment Group – reporting for the first time to the PRI – says that the methodology “provides a useful baseline for Old Mutual to assess and track our progress with regard to our responsible investment practices… For a group as diverse as ours it provides a useful transparency framework for engaging with our stakeholders.”
The PRI has won plaudits for the efforts it has made in developing a sensible methodology – and one that is likely to be especially useful for smaller funds or asset owners who are taking their first steps towards responsible investment.
“For funds starting out, it’s a useful framework to start with,” says Aled Jones, London-based head of responsible investment for Europe at Mercer. He suggests that asset owners turn to their investment managers for help with data collection – many of whom are PRI signatories themselves.
He notes that each signatory will get an automatically generated responsible investment report from the PRI that they will be able to use as a basis for their own wider responsible investment disclosure – along the lines of the corporate social responsibility reports that non-financial companies use to complement their annual report and accounts.
But while the new reporting methodology will undoubtedly prove useful for many asset owners, some fear it may deter others. “It’s probably about right for existing signatories,” says Emma Hunt, a senior investment consultant at Towers Watson in London. “But it will be a big barrier for the next level of potential signatories – such as corporate pension funds – that we want to see within the PRI. “They don’t have a heritage of public reporting, and it will be quite a big leap for this group,” she says.
Responsible investment advocates are hopeful, however, that the new methodology will bring transparency to the field and, as a result, encourage improved performance. “It will bring more insight into what people are actually doing,” says Van der Weide at PGGM.
Macready believes the new approach will lend greater consistency to reporting, where previously he says there was “considerable ambiguity” in many questions. And he is “optimistic that it will weed out some of the players in the space who claim to do a lot but, when it comes down to it, can’t quantify or substantiate their claims”.
He concludes: “We expect increased transparency to be good for our industry as it encourages better practice and gives consumers greater confidence.”