Investors at this week’s PRI in Person event have thrown down the gauntlet to the UN-backed Principles for Responsible Investment (PRI) initiative on its future.
After praising the work the initiative has done over the years, Paul Clements-Hunt, founder of the Blended Capital Group, said at the event in Cape Town, South Africa: “The PRI has to continue asking the toughest questions on economic and political power. If it doesn’t do that, and it doesn’t stand up, all [it has] done is create a country club, which is inward looking.
“That is my contention in terms of asset owners at the moment. You have to go back to the question ‘why did we lose 30% of pension assets in one week in September 2008?’
“A lot of asset owners and a lot of asset managers did not ask the questions in a timely manner. And we have got to keep revisiting that, even if the markets pick up.”
Clements-Hunt said part of the problem with the financial sector was the transition of financial investment from a model of relationships to transactions and finally to a trading culture.
As trading culture dominates across the markets, it presents a huge challenge for asset owners anywhere in the world
“Culture in financial investment corroded over the last 25 years in terms of globalisation and super computers, and the dominance of data replacing wisdom in the market is another facet,” he said.
“We have seen in the OECD countries, the major markets, a normalisation of models of remuneration, which are completely unsustainable. And it goes on – misaligned incentives, principle agent problems.
“Globalisation may have raised hundreds of millions out of poverty, but it can intensify inequality at any level in every country, and it then drops people back into poverty.”
He said that while Nordic pension funds, for example, understood the growth story of Africa, they were put off by its headline risk.
“The PRI needs to look back in 2023 and ask itself whether it has moved the dial in terms of concentrated private capital flowing into productive investments in Africa alongside the South African Government Employees Pension Fund, alongside the Nigerian Pension System [and others], or whether it is a country club,” he said.
Jay Youngdahl, trustee at Middletown Works Hourly and Salaried Union Retirees’ Health Care Fund (US), said many trustees – at least in the US – have continued to purchase opaque and complex vehicles despite the damage those vehicles had caused in the past.
He told the audience: “We trustees face serious value issues, and we have the greatest fiduciary duty and are ultimately responsible for values.
“And we often allow political pressure or opulent wining and dining to produce a kind of institutional corruption that can cloud our ability to focus solely on our beneficiaries as we should, and many former trustees are hired by service providers solely to secure access to decision-making, certainly a corrupting activity.”
He said the PRI was under pressure from the divestment strategies of many college campuses in the US.
“Disinvestment is on the rise,” he said. “Given the recent findings of the Intergovernmental Panel on Climate Change, can we really say our style of sustainable finance and engagement with companies whose activities harm the environment matches the scale of the problem? Is the PRI approach effective?”
The PRI launched its new reporting framework at the conference in Cape Town.
For the first time, its signatories, which collectively manage $34trn (€25trn) in assets, will be required to report publicly on their progress towards implementing the PRI’s six principles each year across a wider range of asset classes and investment activities, including voting and engagement, manager selection, appointment and monitoring and the integration of environmental, social and governance (ESG) factors into investment decision-making processes and ownership practices.
By mid-2014, the PRI expects nearly 800 of its signatories to have used the reporting framework to disclose their policies, processes and performance in these areas in an objective and systematic way, using a common language to describe what they do.
This transparency will enable investment managers, asset owners, beneficiaries and the broader public to make their own judgements about the degree of each signatory’s commitment to responsible investment.
Signatories that fail to report will be delisted from the PRI in the second half of 2014.