May 02, 2006
United Nations Endorses SRI Strategies in Launching Principles for Responsible Investment
by Bill Baue
Some 50 institutional investors globally representing $4 trillion in assets have signed on to the
Principles, which promote the consideration of environmental, social and governance factors.
Socially responsible investing (SRI) strategies serve as the foundation for a new United Nations
initiative, the Principles for Responsible Investment (PRI). Launched last week at the New York Stock Exchange with 32 institutional investors
representing $2 trillion as signatories, the Principles gained another 18 institutional
investors--doubling the assets represented to $4 trillion--at the European launch in Paris today.
"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,"
said UN Secretary-General Kofi Annan. "Developed by leading institutional investors, the
Principles provide a framework for achieving better long-term investment returns and more
Citing the lack of a framework as the primary obstacle to
integrating environmental, social, and governance (ESG) considerations into the investment
decision-making process, Secretary-General Annan proposed the development of the Principles in early 2005. The UN Global Compact and the United Nations Environment
Programme Finance Initiative (UNEP FI)
coordinated the convening of an "Investor Group" of 20 institutional investors from 12 countries to
draft the Principles. Another group of stakeholders representing investors, governmental and
intergovernmental agencies, nongovernmental organizations (NGOs) and academics supported the work
of the Investor Group from April 2005 to January 2006.
The Investor Group developed six
overarching Principles, underpinned by 35 possible actions, to guide institutional investors and
asset managers in practicing responsible investment. The Principles include integrating ESG issues
into investment analysis, practicing active ownership and proxy voting, seeking ESG disclosure by
companies, promoting uptake of the Principles, collaborating with other signatories, and reporting
on progress of implementation of the Principles.
The Principles target "large, diversified
institutional investors that operate within a traditional fiduciary framework." The Principles
specifically require signatories to apply the Principles across the entire organization, preventing
organizations from claiming signatory status based on limited SRI fund offerings or isolated ESG
practices. This provision requires organizations to embrace SRI strategies across the board,
though the Principles promote shareowner engagement and active voting while discouraging
exclusionary screening based on ESG considerations.
"Through their focus on engagement,
not divestment, the Principles represent a major milestone in our efforts to root global business
in universal values to achieve a more sustainable global economy," said Georg Kell, executive head
of the Global Compact.
Signatories fall into three categories: asset owners, investment
managers, and professional service partners. Asset owners include some of the largest state
pension funds, such as the California Public Employees Retirement System (CalPERS), the New York State and Local Retirement Systems, and the
Connecticut Retirement Plans and Trust Funds (CRPTF). Other asset owners include the
Universities Superannuation Scheme (USS) in
the UK, the Caisse des Depots et Consignations (CDC) and the Fonds de Reserve pour les
Retraites (FRR) in France, and the Canada Pension Plan Investment Board.
"The United Nations, for its part, must practice what it preaches," said Secretary-General
Annan. "Therefore, I am also pleased to announce that the UN Joint Staff Pension Fund, with nearly $30 billion in assets,
is signing on to these Principles."
The UN had come under criticism for promoting
responsible investment while not enacting it with its own investments, so its signing of the
Principles adds a significant imprimatur to the initiative.
"We at Innovest are delighted
to see the adoption of the UN Principles by so many large and influential investors--we're
optimistic that this represents a significant sea-change, and will enrich the mainstream investment
process considerably," said Matthew Kiernan, chief executive of Innovest Strategic Value Advisors. Dr. Kiernan has been
critical of UN inaction on implementing responsible investment for its own pension fund in the
past. "Inevitably, however, as with any undertaking of this scope, the devil will be in the
details of how each signatory actually breathes real life into the Principles in its investment
The Principles address this potential shortcoming, though may fall short of
"There are no legal or regulatory sanctions associated with the Principles [as
they] are designed to be voluntary and aspirational," according to the Principles website. "There
may be reputational risks associated with signing up and then failing to take any action, but the
commitments are, for most signatories, a work in progress and a direction to head in rather than a
prescriptive checklist with which to comply."
"The initial focus is on innovation,
collaboration and learning by doing," the website continues. "As the project develops over time,
the Board will consider how signatories can monitor and report on progress."
The launch of
the Principles represents their first phase, with the second phase focused on promoting adoption of
the Principles by additional investors, gathering resources to support implementation, and
facilitating collaboration amongst signatories.