United Nations principles for responsible investment! What does it mean? And how does it affect today’s investment strategies? This guide takes a comprehensive look at everything you need to know about UNPRI.
As an investor, the primary concern is mostly the return on investment. Well, at least mine is.
For a long time, I was never keen on responsible investment until recently. A few years back, I was planning to diversify my investment portfolio and came across ESG funds.
I knew of the different investment options, such as mutual funds and trade stocks. But, I was not well-versed with ESG funds.
I’m always on top of things, or so I thought. I kept wondering how I missed it, and it got me curious. That’s when I bumped into the topic of responsible investing during my research.
Apparently, there is an ongoing discussion about responsible investments. And, the industry is driving towards responsible management of investors’ money.
In recent years, responsible investment has taken off. Many investors now know they can achieve good returns while positively contributing to the environment and society.
In addition, the United Nations Principles for Responsible Investment has partnered with investors to promote social and environmental responsibility.
Let me walk you through the UN Principles for Responsible Investment.
Understanding Responsible Investment
For the longest time, many of us have only thought of investments as being all about getting good returns. In fact, few have thought of how their investments reflect their values.
However, investing is no longer only about financial gains. It also includes making a positive contribution to what matters to an investor.
Actually, responsible investment is not new. It is a strategy that guides investors in aligning personal values with investment goals. This helps them invest in businesses with a strong social, environmental, and governance policy.
For me, this investment approach allows me to be part of providing environmental and societal benefits. Therefore, I now invest in firms and organizations that:
- Efficiently use environmental resources
- Promote safe working conditions
- Better corporate governance
This way, I can help contribute to a better world by investing in a way that has a positive impact on society.
Every investment decision I make is now geared towards sustainable investing.
United Nations Principles for Responsible Investment
The United Nations (UN) is the biggest supporter of responsible investment. It has partnered with RRI signatories to help investors understand the impacts of ESG issues on investing.
Generally, it does this by engaging and sharing best practices and providing training for investors.
There’s one fundamental philosophy behind UN Principles for Responsible Investment. That is, social and environmental considerations are critical when making investment decisions.
PRI signatories agree that it is ethically and financially irresponsible to ignore the environmental impact on investments. Traditionally, many investors believed that social and environmental impacts are negative consequences. And that investors can ignore them when making decisions.
However, to counter this long-standing belief, the United Nations Principles for Responsible Investment proposed six main principles.
Signatory organizations must accept and devote themselves to these six principles.
They include:
Principle 1: Incorporating ESG Issues into Investment Analysis and Decision-Making Processes
How to achieve this:
- Addressing ESG issues in investment policy statements.
- Encourage training on ESG issues for investment professionals
- Supporting the development of ESG-related tools, metrics, and analyses.
- Requesting the integration of ESG factors in research and analysis processes.
- Determining how capable the external investment managers are to incorporate ESGs.
- Assessing how capable internal investment managers are to incorporate ESG issues.
- Encouraging academic research and others on this theme.
Principle 2: Become Active Owners, Incorporating ESGs into the Ownership Policies and Practices
How to achieve this:
- Create and disclose an ownership policy that aligns with the principles.
- Cultivate an engagement capability, whether directly or indirectly, through outsourcing.
- Exercise voting rights, where necessary, or monitor voting policy compliance (if outsourced).
- Take part in the development of policies, regulations, and standard-setting.
- Discuss ESG issues with companies
- Request investment managers to undertake ESG-related engagement and report on the same.
Principle 3: Seeking Proper Disclosure on ESG Issues by the Entities We Invest In
How to achieve this:
- Request for standardized reports on ESG issues (through tools like the Global Reporting Initiative).
- Encourage shareholder initiatives and resolutions that promote full ESGs disclosure.
- Request for the integration of ESG issues in annual financial reports.
- Demand for information about adoption or adherence to appropriate standards, codes of conduct, and norms.
Principle 4: Promote Acceptance and Implementation of these Principles in the Investment Industry.
How to achieve this:
- Properly align investment mandates, performance indicators, monitoring procedures, and incentive structures.
- Include requirements related to these principles in the RFPs (requests for proposals)
- Let investment service providers know about our ESG expectations
- Support the development of ESG integration benchmarking tools.
- Re-evaluate service providers who fail to meet our ESG expectations.
- Encourage the creation of regulations/policies for the implementation of the six principles.
Principle 5: Work Together to Enhance Effectiveness in Implementing these Principles.
How to achieve this:
- Address crucial emerging issues together
- Encourage sharing of tools, pooling of resources, and use of investor reporting for learning. We can achieve this by participating in various information platforms and networks.
- Support or develop suitable collaborative initiatives.
Principle 6: Report on Activities and Progress on Implementing the Principles.
How to achieve this:
- Reveal the integration of ESG issues within investment practices.
- Disclose the requirements for service providers as per the principles.
- Appropriate disclosure of active ownership activities, including engagement, voting, and policy dialogue.
- Let the beneficiaries know about the principles and the ESG issues.
- Use a comply-or-explain technique to report on achieved progress regarding the principles.
- Assess the impact of these principles.
To encourage collaboration, UN PRI has set a body that offers signatories the capacity to effectively and efficiently collaborate on various specific company and policy issues.
The forum permits the signatories to ask for support in different activities. This includes looking for co-sponsors to help in shareholder resolutions and setting in motion discussions on topics of concern. Also, provide interviews with the major signatories about best practices, advice, and tools.
Implementation of the Principles
The UN Principles for Responsible Investment are introduced by a leadership commitment from the signatory’s CEO. They are then communicated to the UN.
Investment players also participate in the various engagement strategies endorsed by the Principles. These are on a global, regional, and local level. They involve things like identifying best practices and promoting ESG norms within the investment industry.
The United Nations Principles for Responsible Investment has expanded from its initial 20 institutional signatories to over 180 institutional signatories. It has grown from $2 trillion in assets under management to over $8 trillion in assets under management since its launch in April 2006.
The three types of signatories to the UN PRI include:
- Asset owners,
- Investment managers (companies to manage assets as a third-party provider),
- Professional service partners (companies that offer products or services to asset owners or investment managers).
The top-level leadership is required to be committed across the whole investing business. Signatories choose their category, although the UN PRI’s Board of Directors can make changes if necessary.
The most common type of signatory is the asset owner. An investor is deemed an asset owner rather than an investment manager if they manage more of their own money than that of third-party clients. However, the classifications aren’t meant to be unduly rigid.
Investors who sign the Principles publicly pledge to adopt and implement them where they are compatible with their fiduciary obligations. If signatories to the Principles fail to comply with the principles, they must report on their implementation or explain.
Signatories also agree to examine and improve the content of the Principles throughout time. This helps to improve their ability to meet their duties to beneficiaries. Also, it allows them to better align their investment activities with societal interests.
The Principles are a self-reporting system because they are voluntary. The PRI Secretariat will assist investors as signatories build integration rules and processes.
Requirements of Principles for Responsible Investment
Besides committing to the six principles, the PRI signatories follow specific minimum requirements. Failure to observe these requirements after the first-phase period can lead to the de-listing of the signatory from PRI.
As a result, the signatory will face adverse public relations with United Nations Principles for Responsible Investment.
Below are the requirements for UN PRI signatories:
- Membership Fees
The signatories are expected to pay membership fees according to assets under management.
- Annual Reporting
The signatory is responsible for preparing an annual report on the investing activities. This is according to the framework given by PRI investing.
If applicable, the provided framework includes
- Specific requirements for every signatory
- Particular asset class module
Furthermore, the questions help to;
- Identify indicators,
- Create a peer group,
- Analyze the signatory’s ESG procedure and policies.
- Responsible Investment Policy
The signatories must follow a responsible investment policy. This should outline the strategy for responsible investment. The policy should apply to more than half of the assets under management.
- Responsible Staff
Appoint two individuals to implement the principles of the signatory successfully. The individuals can have other roles in the company.
- Senior-Level Accountability and Commitment
The signatory should establish responsible investment policies procedures that cover senior-level supervisory and accountability roles.
The signatory can form a committee to oversee responsible investment policy.
Typically, UN Principles for Responsible Investing requirements aim to enhance and collaborate best practices for responsible investment. However, you should note that they are not regulatory requirements.
See related: 10 Important Socially Responsible Investing Pros and Cons.
How to Become UN PRI Signatory
Basically, the Principles for Responsible Investment aims to understand the implications of ESGs on investments. It works to support its global network of signatories investors, and include these factors in their ownership and investment decisions.
PRI investors consist of institutional investors such as:
- Development finance organizations
- Pension funds
- Foundations
- Endowments
- Insurance providers
- Wealth and asset managers
- Independent wealth funds
- Investment advisors
- Family offices
- Data and research providers
- Assurance providers
- Brokerage firms
- Stock exchanges
The investors can apply responsible investment on their portfolio that runs across;
- Product solutions
- Asset classes
- Product solutions
Thus, the signatories can choose to focus responsible investment on specific assets. Notably, to become a signatory, they must apply responsible investment on all their assets.
What if you’re not a service provider, asset owner, or investment manager? Generally, becoming a UN PRI signatory is reserved for service providers and institutional investors. But, several ways are still available for other businesses.
Other Commercial Businesses
These are organizations that are not investment service providers in or institutional investors. Nonetheless, they support the initiatives of the UN Global Compact and UNEP FI.
The commercial businesses that qualify to sign up as a PRI signatory are;
- The non-financial corporations that support sustainability can join through the Global Compact.
- Commercial banks can also become signatories. This is through signing up to UNEP FI Principles for Responsible Banking.
- The Insurance organizations supporting sustainability for liability products and not their investments. These can register with UNEP FI Principles of Sustainable Insurance.
Governments, Advocacy Groups, and Membership Bodies
Principles for Responsible Investment works with regulators, governments, advocacy groups, and membership bodies to push for responsible investment. But, only investment service providers and institutions are allowed to become PRI signatories.
All the same, PRI accepts a network of investors such as peer organizations and non-profit industries organizations. These are organizations that publicly support UN Principles for Responsible Investing within their sectors.
Even though network supporters are not PRI signatories, they can benefit from PRI’s openly available resources, activities, and services. The network supporters are not responsible for UN PRI’s governance.
Categories of PRI Signatories
PRI is an investor initiative and differentiates between signatories that directly make investment decisions (investment managers and asset owners) and their supporters, the service providers.
PRI considers asset owners as the leaders in market transformation. This is because they are positioned at the peak of the investment chain.
Asset owners are also the top clients of financial services. And their long-run liabilities align sustainable growth with their interests.
Asset managers accelerate development in their investment chain by successfully implementing responsible investment decisions.
PRI categorizes signatories as:
- Asset owners
- They are motivated by long-term investments
- They top the investment chain
- Directly answerable to the government and beneficiaries
- Investors discretion
- Have a strong legislative framework
- Investment managers
- Responsible for making investment decisions as per stated guidelines
- The asset owners or beneficiaries determine the direction of most of the assets
- Service providers
- Advise investment managers or asset owners on investments, e.g., product selection and asset allocation
- Delivering services like data and proxy voting
PRI Governance and Decision-Making
The PRI board is responsible for categorizing signatories. The Signatory Status Committee recommends and guides the PRI board.
Here is how it works;
- The PRI Board establishes the eligibility and categorization criteria outlined in these rules. The executive then implements daily.
- If the executive determines that an applicant is applying for the incorrect category, it informs them. Also, it cites the criteria for the applicant.
- If the applicant does not agree with the executive’s decision, they can appeal to the SSC. The applicant bears the burden of proof.
- The SSC reviews cases not covered by the standards. And new categorization recommendations are offered to the board for approval.
- According to the PRI Articles of Association and Signatory Rules, the board has the final say on signatory status and categorization.
Why are UN Principles of Responsible Investing Important?
The Principles for Responsible Investment (PRI) initiative, which the United Nations endorse, is a network of multinational investors. This network works together to effect the six Principles for Responsible Investment.
The investment community developed the PRI to reflect the belief that ESG issues can affect the performance of investment portfolios. And that, as a result, it should be taken into account by investors.
Signatories contribute to creating a more sustainable global financial system by adopting the Principles.