United Nations Embraces Responsible Investing
By Michael Kramer This article first appeared in the summer 2006 edition of the Natural Investing newsletter
The United Nations has launched a bold initiative that officially endorses socially responsible investing (SRI) as the international standard. The UN’s new Principles of Responsible Investment provide a global framework for integrating social, environ- mental, and governance factors into the investment decision-making process.
Needless to say, it is quite thrilling to get an endorsement by the UN of the approach that NIS and our clients have taken for years. It is not entirely surprising given the rapid growth of SRI around the world and its acceptance by major institutional investors. Indeed the UN has already been involved in this growth through the UN Global Compact – the world’s largest corporate responsibility initiative – with nearly 3,000 corporate participants and other stakeholders. Also, more than 160 banks, insurers, fund managers and others are involved in the UN Environment Program’s Finance Initiative, working to understand the impacts of environmental and social considerations on financial performance.
In a speech given at the New York Stock Exchange, UN Secretary-General Kofi Annan stated,
“These Principles grew out of the understanding that while finance fuels the global economy, investment decision-making does not sufficiently reflect environmental, social, and corporate governance considerations – or put another way, the tenets of sustainable development. Developed by leading institutional investors, the Principles provide a framework for achieving better long- term investment returns and more sustainable markets.”
The Principles directly link fiduciary responsibility of generating return to the environmental, social, and corporate governance (ESG) issues that affect the performance of investment portfolios across companies, sectors, regions, and asset classes. These Principles require SRI strategies across the board to avoid any partial signatories, and emphasize corporate dialogue and shareholder activism rather than avoidance screening in order to align investors with broader objectives of society.
The six overarching Principles, along with suggested actions, include:
1. We will incorporate ESG issues into investment analysis and decision- making processes.
- Address ESG issues in investment policy statements
- Support development of ESG-related tools, metrics, and analyses
- Ask investment service providers to integrate ESG factors into evolving research and analysis
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Develop and disclose an active ownership policy consistent with the Principles
- Participate in the development of policy, regulation, and standard set- ting (such as promoting and protecting shareholder rights)
- File shareholder resolutions consistent with long-term ESG considerations
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- Ask for standardized reporting on ESG issues (using tools such as the Global Reporting Initiative)
- Ask for ESG issues to be integrated within annual financial reports
- Support shareholder initiatives and resolutions promoting ESG disclosure
4. We will promote acceptance and implementation of the Principles within the investment industry.
- Include Principles-related requirements in requests for proposals (RFPs)
- Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure investment management processes reflect long-term time horizons when appropriate)
- Communicate ESG expectations to investment service providers
- Support regulatory or policy developments that enable implementation of the Principles
5. We will work together to enhance our effectiveness in implementing the Principles.
- Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning
- Collectively address relevant emerging issues
- Develop or support appropriate collaborative initiatives
6. We will each report on our activities and progress towards implementing the Principles.
- Disclose how ESG issues are integrated within investment practices
- Disclose active ownership activities (voting, engagement, and/or policy dialogue)
- Disclose what is required from service providers in relation to the Principles
- Report on progress and/or achievements relating to the Principles using a ‘Comply or Explain’ approach
Already some 50 institutional investors have signed on to the Principles, bringing the total assets impacted to over $4 trillion. Signatories include asset owners, investment managers, and professional service providers in 20 of the world’s wealthiest countries so far. In the US, SRI mutual funds Calvert and Domini have signed on to the Principles, while institutional investors CalPERS, New York City and State Retirement Systems, and the Nathan Cummings Foundation are other notable American signatories.
“Today it is increasingly clear that UN objectives – peace, security, development – go hand-in-hand with prosperity and growing markets,” said Mr. Annan. The Secretary General said that corporate social responsibility is neither a luxury nor a passing fad but an essential financial practice. As such, he indicated that the UN Joint Staff Pension Fund, with nearly $30 billion in assets, has signed on to the Principles.
To learn more about this important ground-breaking initiative, see the full list of signatory companies, and read annual reports up through 2010, visit the UN PRI website at www.unpri.org
UPDATE, January 2011: In the nearly five years since this article first appeared in the Natural Investing newsletter, the UNPRI has grown substantially, with many conventional firms joining the program, including Principal Global Investors, JP Morgan Asset Management, Northern Trust Global Investments, T Rowe Price, TD Asset Management, TIAA-CREF, and MFS Investment Management.
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