What are the UN Principles of Responsible Investment?Article
The Principles of Responsible Investment (PRI) is an organization set up in 2006 to promote 6 Principles (the Principles) designed to incorporate environmental, social, and corporate governance (ESG) factors into investment decision-making. Investors and institutions can participate in the implementation of the Principles by becoming a signatory and meeting a set of further requirements.
The 6 Principles of Responsible Investment are based upon the idea that ESG issues pose a risk to the performance of the investment portfolio. Therefore, ESG matters are a vital consideration to fulfil the fiduciary duty of an investor. The Principles also reflect that a responsible investment strategy is a process that must be tailored to any given organization and its investment approach. These are the 6 Principles of Responsible Investment:
- We will incorporate ESG issues into investment analysis and decision-making processes.
- We will be active owners and incorporate ESG issues into our ownership policies and practices.
- We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- We will promote acceptance and implementation of the Principles within the investment industry.
- We will work together to enhance our effectiveness in implementing the Principles.
- We will each report on our activities and progress towards implementing the Principles.
Requirements for signatories
In 2018, the PRI introduced minimum requirements for PRI signatories. Failure to comply with any of these requirements may result in the signatory being removed as member. In addition to integrating the Principles, the signatory will be required to:
- Pay a Membership Fee: The height of which depends on the assets under management by the signatory.
- Publish an Annual Report: An annual report must be published reflecting the responsible investment activities. The report must meet certain standards as specified by the PRI.
- Issue a Responsible Investment Policy: This Policy must cover at least the investment approach with respect to at least 50% of assets under management.
- Staff Responsibility: One or more individuals must be responsible for the implementation of the Principles.
- Commitment and Accountability: There must be mechanisms for commitment to and accountability for the implementation of the Principles on senior-level.
Fiduciary Duty in the 21st Century
Historically, investors have argued that the consideration of any non-financial metrics is not in line with their fiduciary duty. This archaic view of the fiduciary duty has undoubtedly led to many irresponsible investments. Supporters of the PRI however maintain that it is ethically as well as financially irresponsible to not consider ESG factors when investing. A 2019 report by the PRI has since found that there is empirical and academic evidence showing the importance of incorporating ESG standards into the conception of fiduciary duty.
For investors, the fiduciary duty exists to ensure that they manage other peoples’ money in these beneficiaries’ best interests. Traditionally, (institutional) investors have maintained that ESG issues did not have to be taken into account as they are not relevant to portfolio value, and therefore they are not consistent with their fiduciary duty. The 2019 report by the PRI demonstrates that fiduciary duty should however not prevent investors and asset owners from looking at ESG factors. Rather, neglecting to look into ESG matters may have such (financial) consequences, that this actually is a breach of fiduciary duty.
There are three main reasons why the modern interpretation of fiduciary duties requires the incorporation of ESG issues:
- ESG incorporation is an investment norm: Integration of ESG issues in an investment strategy is becoming a necessary part of investing due to the increased popularity of responsible investing and the PRI.
- ESG issues are financially material: Failure to take into account ESG issues can lead to a miscalculation of risk and value. This, in turn, may lead to a breach of fiduciary duty. Moreover, systemic issues due to the impact of climate change or misgovernance provide for future risks that could impact investment decisions.
- Policy and regulatory frameworks are changing to require ESG incorporation: An increasing number of policies and regulations require active ESG consideration as part of the fiduciary duty.