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September 09, 2011
PRI Issues 2011 Report on Progress
    by Robert Kropp

While integration of environmental, social, and corporate governance factors remains limited as a proportion of the global market, the report indicates that such integration is growing across asset classes.

With almost 900 signatories, the United Nations' Principles for Responsible Investment (PRI) is the largest sustainable investment initiative in the world. If mainstream investors are to incorporate environmental, social, and corporate governance (ESG) factors into investment decision-making, instead of focusing on short-term returns, it is likely that PRI's global reach and influence will have played an important role.

Because of PRI's influence, the publication this week of the initiative's annual Report on Progress makes for necessary reading. As James Gifford, PRI's Executive Director, writes in the report's introduction, "Mainstream capital markets still have a long way to go before they become truly sustainable."

However, Gifford continued, "New mainstream practices around responsible investment have clearly emerged in the last half-decade."

A total of 545 signatories, with $30 trillion in assets under management, responded to PRI's survey this year. Non-corporate pension funds represented 50% of asset owners, while 77% of investment managers described themselves as mainstream.

While the report indicates that increasing numbers of signatories are integrating ESG considerations into portfolio construction—94% of asset owners and 93% of investment managers now report doing so—such integration, "as a proportion of the global market…remains limited," the report found. Across all asset classes, only seven percent of the total market is subject to ESG integration. Last year, it was six percent.

However, significant progress can be discerned in certain areas. Corporate bonds, for instance, a fixed-income product which consists of debt obligations issued by companies to finance capital investment and operating cash flow, were subject to ESG integration in 29% of the cases reported, an increase of five percent over last year. Listed real estate also fared relatively well, with 21% subject to ESG integration, although the number did decrease slightly since last year.

Furthermore, the report found, "The percentage of signatories with RI (responsible investment) processes established for nonlisted real estate investments rose from 28% to 36% since last year."

Significant progress was recorded regionally as well. The percentage of Latin American signatories with a sustainable investment policy increased to 96%, and 81% of Asian signatories now have such a policy as well. Overall, over half the assets managed by respondents is from Europe, while 30% is from North America.

Along with ESG integration, embedding ESG issues in contracts with investment managers is increasingly seen as a crucial development for asset owners. The landmark Fiduciary II report, published in 2009, stated, "Advisors to institutional investors have a duty to proactively raise ESG issues within the advice that they provide, and that a responsible investment option should be the default position."

PRI reports that more than three-quarters of asset owners now consider ESG issues when hiring an investment manager, and 67% include ESG issues in contractual arrangements. However, monitoring of investment managers by asset owners remains somewhat inconsistent, as only 24% report doing so on a regular basis. Furthermore, nine percent of asset owners with such agreements do not monitor at all.

Engagement with companies in their portfolios is a key Principle for sustainable investors, and the report reveals that shareowner engagement has become the norm for most signatories. Most of the 88% of respondents that vote their proxies have a voting policy; 85% of those policies address social issues, and 83% address environmental issues.

A sharp increase in the number of asset owners that explain the rationale for their voting decisions to investee companies was noted in the report. The percentage of respondents that reported doing so increased ten percentage points, to 79%.

Closely associated with shareowner engagement is the ongoing effort by investors to improve corporate reporting on sustainability. Almost three-quarters of respondents ask companies to integrate ESG issues into financial reporting. The report states, "This is perhaps evidence of wider momentum for integrated reporting in the market."

Referring to the recently established International Integrated Reporting Committee (IIRC), the report continued, "The ambitious mission of the IIRC is to create a globally accepted integrated reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format."

According to IIRC, its "intention is to help with the development of more comprehensive and comprehensible information about an organization's total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model."

However, the report warns, "There is no one-size-fits-all approach to how investors are incorporating ESG issues into their investment decisions." Furthermore, the interests of key stakeholders other than shareowners must be considered as well; their interests, the report observed, may well require "granular information" that may be lost in integrated reporting.

In addition, 44% of respondents now request that investee companies use the standardized reporting framework of the Global Reporting Initiative (GRI).

Along with corporate reporting, transparency is served by reporting by investors themselves. This year, 44% of signatories published their responses to the PRI survey online. Over 90% disclose their approach to ESG integration to some extent, and three-quarters disclose their engagement activities. Over half of both asset owners and investment managers publicly disclose their proxy voting policies.

This being the fifth year in which PRI has published a Report on Progress, a section of this year's report focuses on the improvements in enacting the Principles over that time. In every significant area of sustainable investment covered by the report, important signs of progress can be noted. Even though mainstream uptake of the Principles remains limited, the percentage of total assets subject to ESG integration has nearly doubled.

James Gifford stated, "The results of the survey show the tremendous progress made by investors over the last five years in very difficult investing conditions."


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