Carlos Joly: What's so responsible about the PRI?
The Principles for Responsible Investment have largely failed to do what they were meant to, says Carlos Joly, co-chair of the PRI's expert panel.
You would think a body that claims more than 800 signatories that control how $20trn gets invested would have some clout and that its existence would make things appreciably different. After all, money talks. But in this case, I wonder.
When I took on the role as co-chair of the expert group that drafted the Principles for Responsible Investment (PRI), I thought this kind of self-regulation might make a difference, given that the large sovereign and pension funds make up the core of the initiative. Since their constituencies are citizens at large or the masses of employed workers, I thought they would not be subject to the conflicts of interest that riddle bank or insurer-owned asset managers. Might be time for a rethink.
If you don't already know, the purpose of PRI, which is sponsored by the UN, is to generate more responsible investment practices among pension funds, other institutional investors and their asset managers. Its stated aim is to better align investors with the broad environmental and social objectives of society, in the understanding that this also furthers fiduciary duty.
The general idea is that a well-functioning society attentive to environmental concerns and broad-based prosperity is a more reliable underpinning for long-term investment returns than its alternatives. The initiative came from the UN Environment Programme and the UNEP Finance Initiative, which thought it would help channel long-term money toward climate risk reduction, fighting environmental degradation and advancing the UN's poverty reduction goals.
Whether the UNEP is satisfied is for it to assess and say, but I'd be surprised if among PRI signatories the ratio of assets invested toward environment over total assets under management is improving much.
How pension funds, insurance companies and banks allocate money determines to a large degree the prosperity and sustainability of a society. An obvious place to start for our industry, then, is at home. This means cleaning up our own mess inside and the mess we are responsible for outside. Clearly, we've done a lousy job so far. I'm talking about social mess as well as environmental mess.
We've done the easy part, at least some of us have: energy efficiency in our headquarters, paper recycling and stabs at "carbon neutrality" for business travel on the environment side. And on the social side, some of us have looked at child labour in poor countries, discrimination against women in rich countries and blatant cases of labour abuse. What we've done about that falls mostly under the rubric of excluding a few companies from our portfolios - just a few, mind you, so it doesn't affect tracking error in index-tracking funds.
But the real thing, the stuff of everyday life we are responsible for outside, which is how we apply the money the public entrusts us to ensure sustainable prosperity - we largely fail at that. We fail to account for and fail to try to counter the systemic erosion of social sustainability and prosperity brought about by growing income inequality and job loss in our home economies. The large-cap companies we invest in generally are not playing a positive role in that, and we don't take that into account in our ESG assessments or in our engagement activities.
What pressure has the PRI put to the banks that created the junk mortgages, toxic mortgage bonds and derivatives, and drove the lending environment that is largely responsible for the financial meltdown of 2007-08? Has the PRI pressured them in any way? Now that the banking lobby has killed the Volker Rule and defanged derivatives regulation, and is now doing its most to soften financial consumer protection, is the PRI lobbying for tougher regulation, and in the public interest? Why doesn't the PRI get a real lobbying effort going?
What has the PRI done about the absurd over-reliance of its signatories on the credit rating agencies? Has it encouraged signatories to rely on them less? Has it made an effort to incubate alternative rating methods, perhaps rating methods that incorporate some critical environmental, social and governance factors? Has it gotten a discussion group going among its big pension signatories to review the weight given to the rating agencies' sovereign and credit judgments?
Here's a short laundry list of criteria PRI investors might consider for their own investment policy, as well as for deciding which banks, insurers and asset managers to invest in:More lending and investing in small and medium-sized businesses instead of trading own book. Less passive investment in listed companies and more as active investors in both listed and unlisted businesses. Invest in businesses that pay decent wages, pay fair share of taxes and provide a good return to the owners - because their managers and bankers don't rip off the business. More in wind, water and solar-based energies and much less in coal and oil. (If this article gets you to do nothing else, at least read M Jacobson and M Delucchi, Scientific American, 26 October 2009) More in trains, railroads and mass transit and less in cars and trucks. Less allocation to near passive equity strategies and tracking error. Wake up to the fact market tracking is zombie behaviour in the face of repeated bubbles, crashes and black swans - it's contrary to acting responsibly. Do your own independent sovereign and credit assessments.
Responsibility means making choices and exercising priorities. Pension fund trustees delegate to asset managers too much of what belongs to the realm of policy. Most asset managers are loath to making hard choices and are constitutionally ill equipped to stand up for what is right and what is wrong. Their business is to sell as much product of whatever type buyers are willing to buy, whereas being responsible requires commitment to a distinct view of the world, a clearly actionable environmental and social agenda, and an investment strategy carried with conviction over time.
The litmus test of responsible investing is whether your investment portfolio is distinctly different than it would otherwise have been.
Carlos Joly is visiting professor of Finance and Climate at Ecole Superieure de Commerce, Toulouse, France, and formerly in senior management of a leading Scandinavian asset management company.