Impact investing has struggled to date because the industry lacks a universal standard of measuring positive impact, which is why it is time for the UN Principles for Responsible Investment (UNPRI) to take a tougher stance on companies failing to adhere to its guidelines.
The PRI, which was founded in 2005 and monitors firms based on six key principles designed to embed ESG considerations, has taken some steps to ensure its criteria are being implemented. It has said companies that fail to meet a set of ‘minimum requirements’ by 2020, following extensive engagement with the PRI, would result in delisting.
In addition, it was recently reported that the PRI is carefully monitoring one in 10 of the signatories to its responsible investment initiative after an annual audit demonstrated they were failing to live up to their promised ESG attributes. It said it has plans to put 185 of its 1,967 signatories on a watchlist.
While the PRI did not name the companies, it said it included members across the region, of various sizes, with just under one-fifth asset owners, and the rest asset managers.
Genuine implementation
Hortense Bioy, head of passive strategies and sustainability research at Morningstar, believes the PRI is “a good initiative” which demonstrates the industry is prepared to have higher standards. However, she says the time has come to expose those companies simply paying lip service to the principles.
“UN PRI is getting into that stage where after having a few years dedicated to pushing and promoting responsible investment, they now need to make sure that the firms that signed the principles are genuinely implementing the principles, rather than just signing them up just for marketing purposes,” she says.
“Up to now, there were only two requirements to be a signatory: pay the fees and report. The new requirements will be to apply the principles. And if there is no progress over a certain period of time, the signatories will be monitored and encouraged to improve. And if they don’t improve after this period of time, they will be kicked out of the club.
“That will put pressure on a lot of firms to raise their game.”
Bioy explains that the PRI has also received a lot of support from the signatories themselves to be tougher because they want to be part of a “legitimate club”. She says that to increase accountability, the PRI also plans to highlight a group of leaders.
A matter of trust
The end goal of this, says Sophie Meatyard, fund analyst at FE, is essentially ensuring investors can trust the UN PRI logo.
“The two-year timeline being given to asset managers [to apply the principle’s minimum requirements] seems generous but it’s about working together to improve understanding rather than punish asset managers.
“To avoid ESG becoming less meaningful and to maintain trust in bodies like the UN PRI it’s important these bodies move and change over time as more information and naturally more discrepancies occur.”
Leaders and red flags
Darius McDermott, managing director of Chelsea Financial Services, highlights two asset managers that stand out as leaders in this field. These are Aberdeen Standard Investment, which recently launched an impact fund based around the PRI goals, and Rathbones, which has done the same.
Meatyard adds that M&G is another manager that has launched several ESG mandates over the last few years, using its internal ESG team to screen controversial stocks and engage with companies on ESG issues.
She explains that M&G also uses MSCI ESG to ensure controversial companies haven’t slipped through its internal screens and this dual approach is something FE often looks for when selecting who features on the FE Invest Responsibly Managed Portfolios Shortlist.
“If an asset manager is outsourcing it’s ESG due diligence to another company without doing any internal research, this can lead to a disconnect between the manager and the ESG part of the process,” she adds.
“On the other hand, if the team doesn’t use a third-party source to check their own internal ESG research, it can raise trust issues.”
However, aside from research, McDermott explains that with ESG consisting of three elements, some managers are focusing more on one than the others, typically the governance angle – making sure companies are run with minority shareholders in mind.
“Red flags we typically look for are companies that look at ‘best in class’ companies – so the best miners or tobacco companies. This undermines the purpose of the UN goals and does no favours to the fund groups who are doing very good work in the space.”
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