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July 17, 2009
Responsible Investors Show no Sign of Retreat from Principles in Troubled Times
    by Robert Kropp

Report by the UN Principles for Responsible Investment finds that asset owners and investment managers have increased their commitment to Responsible Investing in the wake of the economic crisis.

US-based investment managers that are signatories to the Principles for Responsible Investment (PRI) are successfully implementing the Principles in their investment decision-making, according to the annual report issued by the UN initiative on July 16.

The report, entitled PRI Report on Progress 2009, analyzes the responses of almost 300 global pension funds and fund managers out of the 560 signatories to the PRI. It utilizes research and analysis provided by Mercer, a provider of consulting, outsourcing and investment services. spoke with Garrie Lette, a Worldwide Partner at Mercer, who said in reference to the strong showing by investment managers in the US, "The average size of participants in the US and the UK is comparatively large, and they have better internal resources to develop policies in response to a relatively sophisticated market. The number of SRI investors in the US also contributes to their success."

The number of signatories to the PRI more than doubled in 2008 to 381, and since then has increased to the current number. The report found that 87% of asset owners and 84% of investment managers have policies in place that reference responsible investment (RI) and environmental, social, and governance (ESG) issues. Furthermore, more than 90% of asset owners and investment managers that have a policy have reviewed that policy in the past three years.

Lette said, "Despite so many new signatories, many of whom are relatively small, the number of policies adopted by signatories remains very high."

On the other hand, according to the report, "Signatories that joined the PRI in the early period following its inception achieved higher self-assessment scores than those that signed more recently."

The report organizes the responses of PRI signatories according to the six Principles. Regarding the first Principle, which relates to the implementation of ESG issues in investment analysis and decision-making, the report found that a majority of signatories engage in screening. While ethical considerations remain at the forefront of screening practices, a majority of respondents also consider such financial issues as controlling risk and the elimination of long-term underperformers as factors.

Because the integration of ESG issues into their investment decision-making forms the core of the business of socially responsible investing (SRI) managers, it is not surprising to learn that SRI managers achieved higher scores in the first Principle than did mainstream managers. In fact, according to the report, "the lowest result recorded by an SRI manager exceeded the median among mainstream managers."

"The responses indicate a clear difference between implementation of ESG issues by SRI managers and mainstream managers," said Lette. "While responses across asset classes and geographical regions indicate similarities, the difference in responses between SRI managers and mainstream managers is especially striking."

The second Principle relates to active ownership, and responses indicate a high degree of successful engagement in this area. Sixty-four percent of signatories reported that they vote on all shareowner resolutions in their domestic markets whenever possible. Sixty-eight percent of investment managers and 51% of asset owners have documented their approach to engagement. Only 5% of signatories do not do any engagement, according to the report.

Respondents reported a total of 12,805 shareowner engagements with corporations in 2008. The rate of successful engagements by investment managers was 50%, and 40% for asset owners. The 2009 PRI User Manual defines engagement success as achieving "a considerable part of objectives or milestones that were set when the engagement commenced."

Lette said, "The voting activity by signatories has been very high since the start of the PRI, but there is clear evidence of increasing engagement activity. The PRI Engagement Clearinghouse, which encourages collaboration among signatories, has certainly contributed to this increase."

According to the PRI, "The primary objective of the Engagement Clearinghouse is to provide signatories with a collaborative forum that can transform one voice into the voice of many." In fact, the report found that nearly two-thirds of PRI signatories utilized the services of the PRI Engagement Clearinghouse in 2008, a substantial increase over the 50% reported in 2007.

As a result, about 85% of signatories now report that they collaborate with other investors, indicating a successful implementation of the fifth Principle, which is to collaborate to enhance effectiveness. The initiatives most widely supported by investors were the United Nations Environment Program Finance Initiative (UNEP FI), the Carbon Disclosure Project (CDP), and the International Corporate Governance Network (ICGN).

The report found that on issues pertaining to the third Principle, encouraging companies in which signatories invest to report on ESG issues via such mechanisms as the Global Reporting Initiative (GRI), signatories continue to cite the lack of information from companies as a barrier, despite the fact that they commonly request such information from the companies in which they invest.

In keeping with the fourth Principle, promoting the implementation of the principles within the investment industry, more than 62% of asset owners now include RI and ESG elements in their contractual arrangements with outside managers. In addition, 47% of investment managers now incorporate elements of RI and ESG into incentive arrangements for internally managed assets.

As for reporting on their own activities according to the sixth Principle, a very high proportion of signatories report their proxy voting activities in some form, while an almost equally high number report on engagement relating to RI and ESG issues.

Asked to comment on the possible effect of the global economic crisis on the responses by signatories, Lette observed, "While some respondents commented that they have had to attend to more immediate concerns to keep their companies afloat, the majority of signatories said that the crisis has strengthened their belief in the importance of ESG issues."

Regarding the findings of the report, Lette said, "The broadening of asset classes represented by the signatories to include hedge funds and real estate investors has expanded the influence of the PRI. The report indicates that signatories are showing a genuine interest in improving their performance."

"We are clearly moving in the right direction," Lette concluded.


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