PRI signatories got together in Sydney last week at the annual PRI conference to review their progress on implementing the Principles for Responsible Investment and to discuss the role of the PRI initiative in the aftermath of the financial crisis.
Whilst there is no doubt that the PRI has grown substantially (membership has practically doubled since the subprime crisis, reaching 540 members in mid-2009 or a total of US$ 18 trillion of asset under managerment) and that the initiative has become an influential voice in the financial industry, there is still a daunting gap between what it stands for and seeks to promote and the extend to which signatories are currently walking the talk.
Out of the six principles that signatories have committed themselves too, the first 2 are arguably the ones that require a real fundamental shift in their investment practices. Principle 1 calls for the systematic integration of sustainability considerations in investment analysis and decision-making processes. It was voted the most difficult principle to implement by PRI signatories in the 2008 annual survey – by far (it received twice the amount of votes than any other principle).
Publicly-listed equities have been the obvious place to start. The PRI Secreteriat estimates that 5% of the total US$ 27.2 trillion equity market is managed by asset managers who have signed up to the Principles and are therefore “subject to ESG integration”. On the one hand this is good news for investors because it means that there is still an information advantage in considering long-term issues that are currently mispriced by the market in their investment strategies. But on the other hand it also raises the question of whether this is enough to sway the market (to the point where it recognises the fair value of the stock by efficiently pricing in sustainability factors) and most importantly whether this re-allocation of capital towards more environmentally-minded and socially-responsible companies will be sufficient to usher a transition towards a sustainable, low-carbon economy.
In this year’s PRI report, 94% of signatories indicated that they perform “some integration” of ESG factors in investment processes. Unfortunately, the report does not provide much granularity so it is difficult to estimate whether this is limited to negative screening or whether there is a process in place to systematically analyse ESG issues and feed them into financial valuation and stock recommendations. When asked “to what extent have you integrated RI/ESG issues into your internal active investment decision-making processes?”, only 55% of asset managers responded “to a large extent”. It is no wonder that only about 15 of the 1,518 strategies that Mercer has rated on the basis of how consistently the fund managers incorporate ESG factors into valuation have been assigned the highest ESG ratings.
SAM is one of the most established sustainable asset manager. For over a decade it has been collecting and analysing sustainability strategies for a large number of stocks and refining the way this is taken into account in in-house valuation models. This year for the first time, SAM contributed a case study to the PRI report, outlining its approach to integration. It has also recently published a study demonstrating how this contributes to alpha generation. Hopefully this will inspire other investors to continue to develop ways to make sustainability performance count in investment decisions so that the market as a whole can progressively become more efficient at rewarding leaders rather than laggards.
