PRI signatories report improved ESG integration

Signatories to the UN-backed Principles for Responsible Investment (PRI) have improved the transparency of their reporting, ESG integration and active management, an annual survey reveals.

While the PRI’s “Report on Progress”, a survey of 545 PRI signatories, finds steady improvements in ESG policies and implementation, it also shows just 7 per cent of all global capital is now subject to ESG integration by PRI signatories.

This has ticked up marginally from 6 per cent last year. It is estimated that the $29 trillion of combined assets under management of PRI signatories represents about 10 to 15 per cent of global capital.

In an interview with Top1000funds.com prior to the release of the report, PRI executive director James Gifford (pictured) confirms that broad ESG integration still has a long way to go, despite the gains of the PRI in its first five years of operation.

“Yes, the PRI has a lot of momentum, we have gone from launch, to what I think is still a young and growing initiative,” he says.

“But we are not claiming at all that we are changing the way the economy works yet, and it needs a lot more than one small initiative like the PRI.”

In its latest survey, covering more than 93 per cent of investor signatories, the PRI finds that 94 per cent of asset managers and 93 per cent of asset owners that responded have a responsible investment policy.

The adoption of ESG principles has also been gaining ground in emerging markets. The percentage of signatories in Latin America with a RI policy has risen from 84 per cent to 96 per cent.

In Asia, a region where Gifford says the PRI will focus its expansion efforts, 81 per cent of signatories have a RI policy, up from 71 per cent the previous year.

But the survey shows signatories are not just talking about ESG but are increasingly finding ways to practically integrate ESG into their investment decisions.

Almost eight out of 10 asset owners and 95 per cent of investment managers surveyed apply some level of ESG integration into internally managed, active investments in developed market-listed equities.

“The results of the survey show the tremendous progress made by investors over the last five years in very difficult investing conditions,” Gifford says in a statement launching the survey.

“In particular, the number of investors with policies on responsible investing reveals how corporate engagement and integration of ESG issues is fast becoming essential practice for every long-term investor.”

The survey also shows growing evidence that funds are looking at ways to integrate ESG into other asset classes.

The strongest progress is being made in private equity, with 84 per cent of investment managers saying they are integrating ESG into private equity investments, up from 69 per cent the previous year.

In fixed income, half of the surveyed asset owners’ sovereign fixed income assets were subject to ESG integration, up from 38 per cent.

The survey finds more investment managers integrating ESG considerations into their internally managed infrastructure, listed and non-listed real estate and corporate and sovereign fixed income assets.

Gifford says the PRI supports the push for ESG integration into other asset classes, recently starting several “work streams” dealing with infrastructure, hedge fund and commodity investing.

The survey also reveals an increasing number of asset owners are requiring their external managers to integrate ESG factors.

Interestingly, the survey reveals that the asset owners surveyed are more likely to apply ESG integration to externally managed assets than to their own internally managed portfolios.

Eighty-one per cent of funds integrate ESG factors to some extent into their investment decisions for externally, actively managed assets, compared to 73 per cent for internally managed assets.

The ESG integration that asset owners are seeking from external managers is also wide-ranging, with on average 79 per cent of their externally managed assets exposed to some extent of ESG integration.

Asset owners surveyed are also increasingly considering ESG factors when awarding mandates.

More than a third of asset owners include specific ESG clauses in their agreements with asset managers, and 77 per cent report they consider ESG issues when seeking to hire an investment manager.

Investors are also increasingly pushing the companies they invest in to be more transparent around ESG issues.

Seventy-one per cent of signatories say they ask companies to integrate ESG information into their financial reporting.

Signatories are also becoming more active as owners, with 88 per cent saying they vote at company meetings. Where they voted against management, nearly 80 per cent of asset owners report they informed companies of their rationale, up from 69 per cent in the previous survey.

Along with an increased level of response from investors to the survey, more funds have chosen to publish their responses on the PRI’s website.

Gifford says PRI is encouraged by the 200 investors that chose to publish their response, saying it demonstrated “the significant increase in investor transparency on responsible investment activities”.

The PRI now has 900 signatories from 47 countries, including 209 new signatories who have joined since September 2010. Over the same period, PRI reports 119 signatories left the initiative, which they say is primarily due to the introduction of mandatory annual membership fees.