Get Active Or Get Delisted, Responsible Investment Group Warns Funds

Fairfax - Ruth Williams

Super funds and fund managers keen to spruik their responsible investment credentials will need to work harder to avoid being delisted by the Principles for Responsible Investment, with the London-based group saying it will push its 1900-plus members to be more active on issues like climate change, human rights and corruption.
The PRI says it is raising the bar on what is expected of its signatories, which hold a collective US$70 trillion in assets under management.
Its numbers include passive investment titans BlackRock and Vanguard, Norway's giant sovereign wealth fund, Wall Street's Goldman Sachs and Morgan Stanley, and more than 130 Australian institutions including AMP, Macquarie Asset Management, BT Investment Management, Australian Super, Cbus, Hesta, Perpetual and LendLease.
It has put in place minimum requirements, a move it hopes will strip out free-riders in its ranks while bolstering its relevance, more than 10 years after the PRI's launch by then-United Nations secretary general Kofi Annan and a group of major institutions.
And it wants its members to be more active in holding companies to account on so-called ESG - environmental, social and governance - issues, with climate change risks, fracking, corruption, water rights, modern slavery and child labour among its current areas of focus.
Many of its signatories proudly tout PRI membership on their websites, sustainability reports and marketing materials, but about 10 per cent would not currently meet its new hurdles, says PRI chief executive Fiona Reynolds.

Fiona Reynolds says investors need to get "actively involved". Photo: Supplied

She says some who have signed on - perhaps to help win investment mandates - are "not really committed". Without improvement, they risk being delisted within two years.
Among Australian members, "there's definitely some in the top and there's some in the bottom too," Reynolds says.
"You own the company, you need to get actively involved. It's not that you are trying to run the company, it is not to say that you can solve every problem in the world, but you can have an impact."

Hurdles
Reynolds, the former head of the Australian Institute of Superannuation Trustees, wants to see more Australian investors wield their proxy votes against company management when more gentle forms of engagement - like letters to boards and meetings - fail to get results.
And she has called on Australian institutions to get more involved in ESG issues offshore, noting that "the vast majority do not do a lot about their international holdings". When investors work together on issues, she says, "it's much more difficult for companies to ignore them".

The PRI has strongly backed new climate risk disclosure guidelines for companies, championed by Michael Bloomberg. Photo: Michel Euler

In recent years, PRI members have collectively pushed for more disclosure on issues like water quality, air emissions and community consultation and consent by fracking companies, and for improved labour practices in agricultural supply chains.
Late last year, the PRI backed the Climate Action 100+ campaign, launched by 200 institutional investors with US$26 trillion in assets under management, which aims to push 100 high-emitting companies including BHP, Rio Tinto and Wesfarmers to curb emissions and boost climate risk disclosure.
PRI signatories are required to report once a year on their activities, pay their fees and declare their intention to invest responsibly via its six "voluntary and aspirational" principles.
Under the new hurdles, they will also need to have a responsible investment policy that covers at least 50 per cent of their assets under management, name a person within the organisation that is responsible for carrying it out, and spell out who in their group's senior ranks is accountable for it.
They are "not particularly high hurdles", Reynolds says, adding that the PRI would work with signatories who fell short over the next two years, to help them avoid being delisted.
Even now, a handful of signatories are delisted each year for failing to file their reports.
The move to lift membership requirements has been welcomed by some of the PRI's more active signatories. Carola van Lamoen, the head of active ownership at Dutch asset manager Robeco, said some investors had, in the past, reaped the benefits of improved performance on ESG issues without doing the work. The minimum requirements meant the PRI process was "working better", van Lamoen says.
"In the PRI context the free-riders are facing some pushback," she says.

Investment climate
The PRI was launched by the UN, and has its backing, but operates seperately from that body and is funded mainly by signatory fees. While equity investments attract the most focus, the PRIs apply across asset classes including infrastructure and fixed income.
The organisation has about 100 staff world-wide; in recent years it has expanded its presence beyond its London head office, pushing into Asia in 2015 and opening offices in Hong Kong, Beijing and Sydney.
Responsible investing, it says, involves incorporating ESG issues into investment decisions, as part of the process of managing risk and generating sustainable returns. The PRI argues that responsible investment - as opposed to impact or socially responsible investing - "can and should be" pursued by investors whose sole purpose is generating financial returns.
The group has strongly backed the newly-minted guidelines issued by the G20 Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), chaired by high-profile businessman and former New York mayor Michael Bloomberg, which calls on companies and investors to set out how climate change could impact their operations, and how they are responding to its potential risks and opportunities.
The recommendations have been endorsed by companies around the world as well as some financial regulators, including the Australian Prudential Regulation Authority.
The PRI has urged the Turnbull government to endorse the recommendations - a step already taken by the UK, France and Sweden - pointing to the risks posed to Australia's economy by climate change, including to its agricultural and tourism sectors.
But while the federal government has welcomed the release of the TCFD report, and last month encouraged "all stakeholders to carefully consider" its recommendations, it did not to respond to questions from Fairfax Media on whether it was considering formally endorsing them.

Links

• Climate Action 100+
• Global Investor Statement on Climate Change (pdf)
• 'There's nowhere to hide': companies warned on climate risks
• If Business Leaders Want To Regain Our Trust, They Must Act On Climate Risk
• Companies 'Failing' To Deal With Climate Change Risk
• World's Biggest 100 Polluting Companies Put On Notice By Investors To Tackle Climate Change
• Australia's Top Companies Ignore Climate Change, And We Let Them
• ASX Top 20 Companies For Climate Change Reporting In 2017
• Three Quarters Of Companies Worldwide Yet To Acknowledge Climate Change As A Financial Risk