In Good Company
July 01, 2008 | Jordan Berger

How organizations can work together to incorporate ESG into their investment strategies by following the Principles for Responsible Investment.

It is impossible to ignore the growing importance of environmental, social and governance (ESG) concerns. Global financial systems and major corporations have been rocked by scandal, litigation and bankruptcy due to mismanagement of ESG-related liabilities. And there is emerging evidence of the link between corporate reputations and brands on the one hand and financial performance on the other. Consequently, many investors are now incorporating ESG information into the investment decision-making process. The most prominent international initiative among large institutional investors is the Principles for Responsible Investment (PRI).

The Principles

The United Nations (UN) Secretary-General Kofi Annan convened a meeting of 20 large institutional investors in early 2005 to begin the process that culminated in the PRI. These investors worked with the UN Environment Programme Finance Initiative, the UN Global Compact and various academic, government and investment experts to develop the final set of principles, launched on April 27, 2006. Today, there are more than 380 signatories, with the asset owners representing more than US$14 trillion in assets under management. Canada is represented by five professional service providers, six investment management firms and four asset owners, including the B.C. Municipal Pension Plan, the Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board and Comité Bâtirente. The PRI has become the most influential forum driving the direction of responsible investment (RI) strategies. At the heart of the PRI are six principles.

  1. We will incorporate ESG issues into investment analysis and decision-making.
  2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
  3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  4. We will promote acceptance and implementation of the principles within the investment industry.
  5. We will work together to enhance our effectiveness in implementing the principles.
  6. We will each report on our activities and progress toward implementing the principles.

Implementation

Institutions should approach RI in a structured manner, starting with their investment beliefs. Before considering altering fundamental governance documents, the institution should hold an educational session to give the board and senior staff a better understanding of RI. If the decision is made to go forward, the institution will often adopt a statement addressing RI in its Statement of Investment Policies and Procedures.

Key considerations for boards and staff include examining ESG-related tools and third-party providers, considering dedicated allocations to RI strategies, providing ESG training for internal investment professionals and auditing external managers from an RI perspective. In discussions with investment managers, the focus should be on idea generation, portfolio construction, implementation and business management. The quality of the investment process is most important.

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