The UN-backed Principles for Responsible Investment (PRI) is focused on expanding into China, India and the Middle East and driving environmental, social and governance (ESG) integration beyond equities and property and into other asset classes, says PRI executive director James Gifford.
But Gifford (pictured) says India and China are the “next frontier” for responsible investment.
“India and China is where there is a really big market, and where there are really huge ESG risks and opportunities,” Gifford says.
“For the responsible investment movement, this is the next frontier. It is also the right timing because in China, in particular, there is an absolute recognition that, at least from the corporate governance and environmental side, that this is where things should head. There is also quite a bit of Chinese Government support for more sustainable companies and better governed companies.”
Gifford also lists the cashed-up sovereign wealth funds of the Middle East as other investors who could be brought on board to begin what he describes as “the journey” towards integrating responsible investment principles.
Gifford – who was PRI’s founding executive director, and a key figure in drawing up its initial strategy – sees PRI as having a solid track record of encouraging culture change in how investors do business.
“The creation of a culture of active ownership and stewardship in a collaborative way is PRI’s number one contribution,” Gifford says.
“The volume of collaborative shareholder dialogue that is going on is vastly more than it was.”
Gifford cites the Engagement Clearinghouse, PRI’s collaborative engagement initiative as the organisation’s “number one strategic priority”.
The clearing house has seven staff running about 30 different engagements involving more than 300 signatories, Gifford says.
“This is first time there has been a systematic process to mobilise and leverage collaborative shareholder engagement on a global level,” he says.
As part of its activities, the clearing house provides an intranet, where signatories can see what engagements are being conducted, pool their resources and expertise, and add their weight to discussions with a particular company.
Gifford says this online tool allows investors to use limited ESG resources more effectively, and increases the quality of engagement with companies.
“When that coalition of investors goes and talks to a company they are very well informed, as well informed as they can possibly be, and the conversation can be at a much higher, more sophisticated level,” he says.
“The companies also appreciate well-informed investors, rather than people going along to a company to discuss something that may have been in the media.
“So, the Clearing house is a way to get the investor/company dialogue to be well informed, constructive, [and] to have very clear goals about what it is that has to be done.”
Gifford says that one of the most significant engagements the clearing house has recently been involved in is on the question of investment in war-ravaged Sudan.
The clearing house facilitated discussions between investors about the merits of engaging with Sudan and the possible unintended consequences of divesting.
The Sudan Engagement Group (SEG) is now made up of 22 institutional investor signatories with approximately $2.1 trillion total assets under management.
The investors have engaged directly with companies operating in Sudan and have been involved in discussions with the Sudanese Government.
“For the first time ever, there are strong signals being sent to multinational companies operating in Sudan that investors, and these are large mainstream investors, are very concerned about these issues and they want to ensure these companies are managing these risk appropriately and are not making these problems worse,” Gifford says.
“It is very profitable to have economic stability and the protection of human rights, and markets that are not corrupt and markets that are open. So there is no inconsistency with the types of goals that the United Nations is promoting in terms of peace, security, human rights and anti-corruption and prosperity.”
In the past year the clearinghouse has also drawn up an evaluative framework for investor engagement.
Gifford says much of the pre-PRI collaborative engagement efforts were ad hoc in nature and this framework is designed to provide clear goals to steer what can be protracted discussions.
Engagements typically take more than 18 months, with many running for more than three years, says Gifford.
“We spent the first few years learning how to coordinate collaboration and now we have established a framework that ensures investors are clear about what they want from the companies, they allocate the resources that are required, that sufficient follow up is done and that people are held to account,” he says.
Engagement issues include concerns over water usage, carbon disclosure, efforts to improve ESG performance in emerging markets, and calls for a legally-binding arms-trade treaty.
Asset owners make up 33 per cent of signatories involved in clearing house engagements, 52 per cent are asset managers and 15 per cent are other service providers.
Gifford says the clearing house has also begun to look at how responsible investment principles can be built into investment decisions in other asset classes such as infrastructure and fixed income.
PRI is working with the Swiss Government and a Swiss consultant around a responsible investment framework for commodities investment and is also in dialogue with hedge funds.
Gifford points to engagement PRI has undertaken in the past two years with private equity firms as an example of the way major players in an asset class can be bought on board, creating momentum for change.
“One of the UN PRI’s great successes has been in private equity,” he says.
“We have really pushed that industry a long, long way. If you look at the public policies of KKR [Kohlberg, Kravis & Roberts] and Carlyle and others on these ESG issues, in a very short period, less than 18 months for a lot of them, these private equity funds are working with asset owners on a PRI-co-ordinated process.
“They have now developed policies and reporting frameworks that just were not there two or three years ago.”
While Gifford says momentum has been created in its first six years of existence, he is quick to note that major challenges still lie ahead.
The UNPRI covers about 10 to 15 per cent of the total estimated global investment capital, with many signatories just starting to look at moving from aspirations to concrete action.
“The PRI is a step by step initiative. It’s a journey not a hurdle,” Gifford says.
“If you look at the big picture, at the global economy, the UNPRI has a long way to go. Responsible investment, and stewardship and corporate governance, all of these things still have long way if they are going to really fundamentally change the way investors do business – but we are making an impact.”