As socially responsible investing has grown in recent years, so too have the number of organizations looking to create some sort of accreditation for investors.
Groups like the Sustainable Accounting Standards Board, the Global Reporting Initiative and CDP Global are looking for ways to provide a sort of Good Housekeeping Seal of Approval that reassures investors their money is being put to work in a way that they intend.
PRI has grown to have nearly 2,500 signatories representing more than $80 trillion of assets under management,
One of the oldest, and most established, of these is the Principles for Responsible Investment, a United Nations-backed effort that demonstrates an organization’s commitment to responsible investment practices.
Established in 2006, PRI has grown to have nearly 2,500 signatories including asset owners, asset managers and service providers. In all, they represent more than $80 trillion of assets under management, making PRI the largest form of accreditation in the sustainability sector.
Signing the principles is a way to demonstrate an organization’s commitment to responsible investment practices. It’s a chance to align one’s missions and values to those who receive, deploy or service capital. It’s also a sign of intent: Many sign the principles, or plan to sign them, because they aspire for a more sustainable organizational and global financial system.
Misconceptions
But while the popularity of PRI is undeniable, many middle-market professionals still misunderstand its core tenets. There are several misconceptions:
The principles themselves are voluntary. Rather than PRI requiring certain practices surrounding responsible investing, PRI instead applies a framework for what an organization intends to do. Think of these rules as more aspirational than foundational. Organizations look to improve in areas like climate change, human rights, and board diversity and structure to drive better investment outcomes.
Many middle market organizations believe that they must already have responsible investment practices in place today, rather than to use the framework to improve responsible investment practices for the future. In reality, the PRI approach has attracted all kinds of organizations oriented to sustainability, both in the early stage or late stages of development. Just because a company doesn’t have a fully functioning responsible investment strategy doesn’t mean the company shouldn’t aim to achieve its principles.
For this reason, certain accommodations are made for first-year signatories. The first year of membership does not require reporting disclosures, meaning that most organizations formally report after 12 to 24 months of signing up with PRI. With the number of signatories increasing by approximately 25% from 2018 to 2019, it’s no surprise that the number of inquiries for reporting instruction, too, has increased. PRI’s solution – the Sustainable Development Goals – articulates 17 such goals including poverty and hunger, education, clean water and energy, economic growth and industry and innovation.
Source: Bloomberg
Many of the PRI disclosures can be made private. Although signatories must report all information included within its framework, certain information can be held private, protecting those who do not yet demonstrate best-in-class responsible investing practices. PRI instead offers a platform to develop community with other like-minded organizations inside and outside an industry, to learn from one another, and to focus on the development of sound responsible investment practices. For those who are far more ambitious or who have best-in-class attributes, PRI offers the ability to benchmark among its PRI peers a valuable exercise for a committed PRI signatory.
PRI doesn’t independently validate the data it receives. The lack of data quality and inconsistency in its presentation is a major challenge for decision-makers. This creates a major void for investors to evaluate actual performance amongst peers. And worse, many people still are unclear on data terminology.
A whole new industry of accreditation has emerged, where asset managers and owners are requesting data validation to support their investment standing. Increased regulatory and stakeholder pressures and rising social and environmental concerns will continue to push organizations to adopt reporting practices. But the market will need certification no different from organizations that prepare financial information and seek independent audits.
A chance to evaluate progress
So while responsible investment reporting continues to evolve, PRI remains a notable option.
PRI offers the chance for investors to evaluate an organization’s responsible investment progress against an industry framework, benchmark the performance of public data, and then to summarize its activities for stakeholders.
Signatories report how they will incorporate ESG issues into investment analysis and decision-making processes, including the processes and controls that it will follow. Most important, they report activities and progress made by each principle.
In the end, this maintains accountability, standardized reporting transparency and regular feedback that help an organization learn and develop.
