The UN-backed Principles for Responsible Investment (PRI) is considering a seventh principle that will focus on broad financial system systemic risks.
The six principles were written before the global financial crisis and are focused on environmental, social and governance (ESG) integration. Now, a decade after their creation, consideration of systemic risks is on the agenda and part of a consultation with signatories regarding a 10-year blueprint for making responsible investment mainstream.
Managing director of PRI, Fiona Reynolds, says this will include policy and behavioural issues affecting the financial system.
She said this would include the role of asset owners in addressing policy issues, the role of stock exchanges, and the impact of high-frequency trading, short-term payment incentives and short-term mandates.
The PRI will conduct a consultation with signatories regarding the development of a seventh principle in the middle of next year.
The six principles were developed 10 years ago and are focused on implementation and the effect of ESG on portfolio holdings. But the PRI’s mission is focused on an economically efficient and sustainable global financial system, so the evolution of the principles to include systemic risks is a natural step.
“We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole,” the PRI mission says.
PRI has engaged an independent Dutch consulting firm to measure the PRI’s impact over the past 10 years and will launch this document at its tenth birthday celebrations in New York next April.
Separately it will produce a blueprint outlining the areas of focus for PRI in the next decade in making responsible investment mainstream. This will include interviews with signatories about systemic risks.
“We are recognising that as universal owners, asset owners are in the whole market so they have to care,” Reynolds says. “We’re calling this PRI 2.0 internally, and focusing on what we need to do to get to the next level.”
Speaking at conexust1f.flywheelstaging.com’s Fiduciary Investors Symposium at Chicago Booth School of Business in October, Martin Skancke, chair of the PRI Advisory Council, called on investors to step up to the conversation about the systemic risks such as carbon risk and long-term stability of markets.
“The asset owner perspective is missing. Asset owners are not necessarily in the market daily, they are removed from the market, but are paying the costs of an inefficient market,” he said.
“You should be asking ‘What does a good trading place look like for me? Who should be allowed to trade? How should information regarding trades be made available and to whom?’ These are really important questions and asset owners are absent from the conversation.”
Skancke said some of the perceived conflicts between ESG and fiduciary duty come from a misconception.
“For me it’s about the stability and usefulness of the financial system itself,” he said.
“It is seen as responsible investment limiting the investment universe. All investors exclude assets for various reasons; for example, you don’t believe in the business model, don’t like the market, the investment doesn’t meet cashflow requirements. It’s just another constraint.
“For me it’s about widening your information set, not limiting the investment universe. How do you organise the information set and take a broader view of the risks you’re taking?”
ESG as a fiduciary duty is about raising the standard of corporate behaviour generally, he said.
The six principles are:
Principle 1: we will incorporate ESG issues into investment analysis and decision-making processes
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry
Principle 5: We will work together to enhance our effectiveness in implementing the Principles
Principle 6: We will each report on our activities and progress towards implementing the Principles