Introduction to the UN PRI and the practical application of responsible investing

Welcome, everyone. Thank you for joining our webinar. We’re happy to have you. I’ll hand it off to Julie to get us started.

Panelist introductions

Julie: Thank you for joining us. My name is Julie Dixon, and I am the CEO of Waystone Compliance Solutions. Waystone is a global compliance risk and governance firm that prides itself on its commitment to ESG initiatives. I am pleased to have with me today three panelists, Rebecca Palmer from Waystone, Anna Skrivanou from UN PRI, and Freya Bannochie from UN PRI. To give you a little bit of background on our panelists, Anna Skrivanou is a relationship manager in the UK and Ireland team at the UN-supported Principles for Responsible Investments, supporting investors on their global responsible investment journeys through tools, resources, and guidance. Anna has eight years of experience in asset and wealth management. Prior to PRI, Anna worked at HSBC Asset Management in London as a relationship manager in the global wholesale team focusing on key distributors as a discretionary investment specialist, looking after high-net-worth clients.

Anna holds the CISI Level 7 Chartered Wealth Manager Qualification, an MSc in International Financial Management from the University of Surrey, and a BSc in Economics from the University of Athens. I also have Freya Bannochie. Freya is a policy analyst at the PRI, working on a variety of issues across sustainable finance policy in the UK. Prior to joining the PRI in 2021, Freya worked as a research analyst at an investor relations firm while also taking sustainability advisory projects with separately managed accounts through her own consultancy. Before this, Freya worked at a pension consulting firm. Freya holds a degree in biological anthropology from Durham University. And then I’m also pleased to have with me my colleague, Rebecca Palmer. Rebecca is an independent professional director at Waystone and leads our advisory practice on ESG. So, I think we will go ahead and begin. And prior to Waystone, Rebecca was a partner at KPMG in the Cayman Islands. So, we would like to go ahead and begin. So, I’m going to ask Anna to go ahead and begin to spend some time with us on the critical initiatives pursued by the UN PRI.

Principles for responsible investment

Anna: Thank you, Julie. And thank you all for joining us today. As Julie mentioned, I’m Anna Skrivanou. I’m the relationship manager in the UK and Ireland team based in London. And over the next 10 minutes, I will give you a brief introduction to the Principles for Responsible Investment. For those of you who don’t know who we are or how we are formed and what we do, in early 2005, Kofi Annan, the then United Nations secretary general invited a group of the world’s largest institutional investors to join a process to develop the principles for responsible investment. The principles were then launched in April 2006 at the New York Stock Exchange. And since then, we have grown from 100 signatories to just under 5000 signatories today globally, which represents an indirect AUM of over 120 trillion U.S. dollars, which embodies the strength of the group. And it’s a powerful figure when you think about signatories coming together to sign letters to governments or companies on ESG issues.

Overall, the PRI’s goal is to help create a more sustainable financial system and to aid investors to achieve this by incorporating ESG factors into their portfolios and decision-making, not just as the right thing to do, but in a way that makes sense to the investment community. The PRI has two UN partners as you can see here, the UN Environment Programme Finance Initiative and the UN Global Compact, which play an important role in delivering the PRI strategy, including holding a seat each on the PRI board and providing additional avenues for signatories to learn, collaborate, and take action towards responsible investment. Moving on to our mission, we have six principles like you can see here. They’re voluntary and aspirational and very adaptive and apply differently to different asset classes and investors. But in principle, we expect all our signatories to embody these principles. To summarize them, they’re about integration, transparency, active ownership, and offer a menu of possible actions for incorporating ESG issues into their investment practice.

Signatories

Moving on to the next slide, you can see we have…as I mentioned before, we have just under 5000 signatories. We have signatories all over around the world. Our largest signatory base is in the U.S., followed by the UK, and Ireland, and Europe. But we are increasing our presence in other parts such as in China, Latin America, Africa, and the Middle East. So, now, on how the PRI works with investors. In this slide, essentially, we have translated what we typically see as signatories’ aims into the services that we offer. So, starting on the left-hand side and in the middle white box is the investment practices team, the asset class experts, essentially. They produce guides, case studies, webinars to inform investors on how to incorporate ESG considerations into the investment decision-making and ownership practices in a systematic way.

We cover a range of asset classes from the more traditional, such as listed equity and fixed income, to private markets, such as private equity infrastructure, real estate, and so on. Then we’ve got the stewardship team or active ownership team, and they are there to help signatories become active owners. They offer various toolkits on how to effectively engage across the different asset classes. Our policy and research team, which is a vital team for the PRI, they’re engaging with policymakers, respond to consultations, produce guidance work, and do policy advocacy work. To give you an example, our EU policy team has been instrumental in engaging with the European Commission on EU taxonomy work. The team provides regulatory insights as well as tools and guidance to support signatories with policy action and implementation. In terms of the issues-based teams that you can see here, you will notice that Climate forms its own team and focuses on climate reporting, scenario analysis, and planning.

ESG Team Projects

In terms of our ESG teams, I will mention some of the flagship projects that teams will be delivering over the next two years. On the environmental team, the focus will be biodiversity and sustainable commodities. Our social team will focus on human rights, for example, projects on decent work and diversity, equity, and inclusion, and the governance team on projects such as tax fairness, digital transformation, and artificial intelligence. Finally, the sustainable development goals are driving our work on sustainability outcomes, and the team is building up a bank of case studies and practices that will help signatories implement activities around the SDGs should it be something that you would like to look at. Then moving on to the more operational teams, we have the reporting and assessment team, which is responsible for the reporting framework and data portal, and I’ll go into the details of the reporting in a minute. The signatory relations team, when you join your PRI, you’ll be appointed to a relationship manager, such as myself, to help you navigate through the resources and support you, and they usually speak your language. This is always helpful. Last but not least, the events team who organize local and global events. The next global event will be in Barcelona towards the end of the year, and we look forward to welcoming our signatories then.

Signatory Obligations

So, now, let’s look at the obligations when an investor becomes a signatory to the PRI. Of course, all signatories commit to the six principles, and Principle 6 states that we will each report on our activities and progress towards implementing the principles. It is a foreign requirement for signatories to report on the responsible investment activities on an annual basis. And they do that through our in-house tool. The PRI reporting is the largest global reporting tool on responsible investment for institutional investors. For example, in 2021, just under 2800 institutional investors completed it and 300 service providers. To dive a bit deeper on the reporting objectives but also the benefits to investors, first, the reporting framework ensures accountability of the PRI and its signatories and provides a standardized transparency tool for signatories reporting. Second, we see the reporting as an important educational tool for investors. Signatories receive feedback on the responsible investment progress and activities, and they can evaluate the progress, and they can benchmark themselves against their peers, and, more importantly, they can use the reporting to communicate the progress and responsible investment activities with internal and external stakeholders, existing and potential clients, and even regulators. For us, for the PRI, the reporting offers a unique opportunity to use all the signatory data on an aggregate level, to present the big picture, analyze trends, and create a leading guidance for signatories on various teams.

How to Become a Signatory

Moving on, I’d like to showcase our collaboration platform. It’s an online hub, essentially, for signatories to connect and collaborate. We believe it’s a great tool, it’s a great way to collaborate, exchange information with peers, design engagements, launch consultations, and so on. So, I would encourage you, if you sign up to the PRI, to have a look at our collaboration platform. Now, on how to become a signatory, it’s a straightforward process. You complete an online application, send it to us. You can see all the steps in this slide. And once the application is approved, we ask you to pay the fees, and then you are listed on our website. Talking about fees, the fee is scaled according to the assets under management of your organization. And you can see here the different brackets. Finally, please get in touch. You can see we have representatives in every region. And we will be more than happy to answer any questions you may have or provide any more details on what I discussed today. And also, for general queries, you can use our email address [email protected]. Thank you, Julie. Back to you.

How to Address Concerns and Skepticism

Julie: So, thank you. I should also mention that Waystone is a proud signatory to the UN PRI, so we feel very confident in the principles and their application and the way in which we believe they will affect the investing community. Now, I will say though that there remains some skepticism around responsible investing and the double bottom-line proposition. You know, there is some skepticism in the marketplace, so whether it’s possible to do well by doing good. Now, I’m going to ask my colleague Rebecca to comment on how you’d recommend addressing those concerns and getting stakeholder buy-in from those that might believe responsible investing is contrary to their true fiduciary duty. So, Rebecca, do you want to comment on that concept a little bit? I think your background as an independent director actually makes you particularly well-versed in the concepts of fiduciary duty and how funds in particular have to manage that concept. 
 
Rebecca: Yeah. Absolutely, Julie. I mean, it’s something, you know, that there’s a growing body of research out there that shows that it is possible to do well by doing good. And, you know, I was involved in a piece of research a few years back with Kara and Emma, where we were interviewing, you know, a number of managers and asset owners globally. And there was quite a lot of skepticism, I think, even a few years ago, but the dialogues moved significantly. I think it is definitely possible to generate alpha certainly by looking at, you know, portfolio companies that are what I’d call ESG improvers. I think focusing on those, and, obviously, that lends itself really well with this concept of active engagement that I believe Anna and Freya will talk a little bit more about later on in the discussion. But equally, you know, from a risk mitigation standpoint, you know, I think ESG factors can have a material impact on financial performance. 
 
I mean, we’ve seen at the moment, you know, there’s activist investors actively campaigning at the moment, you know, two of well-known global fast-food chain around animal rights issues. You have the issues with stranded assets in some of the traditional sort of energy companies. And, you know, these will have a material financial impact in the future. Yeah, some of that’s potentially already baked into some of the asset prices we’re seeing. But certainly, this has become more and more important. And I think it’s now become, you know, certainly a must-have in terms of a risk management framework, you know. And there are managers out there that are doing really, really well in terms of alpha generation. You know, on the fiduciary side of things, you know, I think it’s really important to understand investors’ needs, and see, my job on the board of directors of funds is there to protect investors. We are seeing investors care more and more about this. So, you think about this huge transfer of generational wealth that’s happening at the moment. You’re seeing millennials take over family offices. You’re seeing CIOs of university endowments really having to listen to their student bodies who really fundamentally care about this. So, you are seeing the shift in how investors actually view ESG and responsible investing. 
 
You know, the fiduciary element, obviously, the DOL in the U.S., as you see, there’s a bit of a debate around that, particularly around sort of ERISA plans. But that being said, we saw and the proposed rule come out in full in 2021, that indicate that they are sort of lifting their stance on this, and it might be possible to actually be, you know, applying ESG factors as part of a risk framework and that they’re not necessarily…not in align with the sort of principles around prudence that the ERISA plan trustees are required to have. That being said, I think we still see some hesitancy for funds, particularly, they have a risk to investors in there around marketing their funds as ESG around that, but I do think that will change. You know, I sit in the Cayman Islands. You know, I was very pleased recently to see the Cayman Islands monetary authority make an announcement with respect to ESG and the board’s responsibility. You know, just I’m going to read this out, because I think it’s powerful and impactful the way it’s written. You know, CIMA advices that, at a minimum, those charged with governance of regulated funds should have clear roles and responsible in managing and mitigating the risks from climate change and other ESG-related risks in line with the fund’s set investment objectives and should start establishing reliable approaches for identifying measuring, monitoring and managing material ESG-related risks. 
 
And, you know, that concept of material is quite fundamental. You know, not all ESG risks and factors have the same impact, so we should be focusing on those that will have a material impact. And, you know, my job as a fiduciary is very much to oversee that and ensure compliance with policies and procedures. And to go back to the question around sort of strategic buy-in and how you can get buy-in with key stakeholders that, you know, I think it’s really important to, you know, as you plan any new initiative to upskill and make sure you understand and understand why this has been driven, you know, and take your case to the decision makers at your firm. And that’s, again, one of the things that I think, you know, being a signatory of the UN PRI and, you know, the number of resources that are available can really help you formulate that argument. And perhaps, Freya, it’d be helpful maybe just to hear from you in terms of your thoughts around this particularly on the fiduciary side. 
 
Freya: Yeah. Thanks, Rebecca. And this double materiality or double bottom-line question is a very commonly explored question, and it’s got some really important implications for all the financial institutions in our society. The PRI views that fiduciary duty requires investors to incorporate all value drivers, which include ESG factors, into decision-making. Last year, we took on some really cutting-edge work in order to go beyond these kinds of existing interpretations of fiduciary duty. And this kind of helps to answer the question. Alongside some partner organizations, UNEP FI and the Generation Foundation, we commissioned a report called A Legal Framework for Impact, which contains some really groundbreaking analysis from the law firm Freshfields. We set out to determine the extent to which legal frameworks enable investors to consider and pursue impacts in their investment activities, and this analysis took place across 11 Key jurisdictions. 

Key Report Findings

The report found that there were differences across regions, asset classes, and investor groups. But it is generally likely that investors are required to consider and use sustainability impact approaches where they can be effective in achieving financial goals such as those laid out in investment mandates. And the most enabling frameworks are found to be those in the EU and the UK. And these legal frameworks both permit and, in many cases, actually require investors to intentionally pursue positive sustainability impact goals, and this is often when it’s necessary to manage risk and achieve returns. In order to make this pursuit of sustainability impact part of the mainstream investment, a collective exercise between both the policymaker and the investor is needed to overcome these barriers to action. And going back to this question, it’s not only possible for investors to pursue impact goals and financial return, or to have this double bottom line approach, but in some cases, it’s actually legally required. And simply put, the findings of this report that we’re very proud of and proud to be working on provides a really solid backing for investing for sustainability impact to become a really core part of mainstream investment activity. And I’ll be sure to share some resources on this after the webinar.

Best Practices for Responsible Investing

Julie: So, thank you, Freya. You know, I think that we are very interested in new managers and how they would apply this, so at Waystone we speak with many people who are in the beginning stages of setting up their asset manager. And so, a lot of them are at different stages of that responsible investing journey and understanding the concepts. So, we do have these new and emerging managers that are in the process of initial ESG policy drafting, and they are evaluating how that responsible investing may be incorporated into their strategies, those that are applying some form of exclusionary screening in some instances and others where ESG factors are fully embedded in the investment decision-making practices. So, we do see kind of people at different places in this. So, I’m going to ask Anna to comment on some best practices that you’re seeing and some practical ways in which managers can incorporate responsible investing. So, in other words, Anna, I think we’re looking for how do we make it easy for our emerging managers that are just getting started?

Anna: Sure. Thanks, Julie. First, I’d like to echo to your point about asset managers being at different stages on the responsible investing journey, because we do see this with our signatory base, where we have signatories joining the PRI in order to start and draft their policies and put in place their ESG practices and others that are quite advanced. And at this stage, I would say that we welcome all signatories irrespective of where they are in their responsible investment journey to join the PRI in our mission. Because, you know, we consider ourselves a big tent organization, and we are committed to encouraging and engaging with investors to consider ESG factors in their investment decisions. And it’s interesting because we have been asking our signatories whether they would prefer us to remain an inclusive organization or more exclusive, and the resounding answer is that they want us to be a big tent organization.

Back to your question with regards to best practices. First, I’d like to comment that we are very happy to see the uptake of advanced responsible investment practices has been steadily increasing. Last year, in 2021, we analyzed the reporting data and compared the 2016 versus the 2020 responses. And this analysis goes specifically into which practices previously deemed advanced have shifted to become the norm and which, of course, remain advanced. So, I will just mention some interesting findings that, for example, the use of fixed income-specific engagement policies has tripled, and the number of bondholders measuring ESG performance has more than doubled. So, most asset owners now review their managers’ stewardship and voting practices while the majority stake managers whose engagement outputs feed into their investment decision-making. So, these are very interesting results.

So, in terms of best practices, to directly answer your question, of course, it differs for each asset class. For listed equity investments, the best practice would involve building a process for the longer term. And because it is vital that valuation and risk models capture the full impact of ESG risks and opportunities. Proactive engagement is also essential, and we believe that we should not be outsourced. Because when engagement is outsourced to isolated ESG teams, there’s valuable investment information that is lost from the investment decision-making process. In other asset classes, for example, in infrastructure, leading practice is also about the sharing of sustainability expertise with others in the industry. And in private equity, it will include the integration of ESG factors into investment sourcing, due diligence, and decision-making, and also, of course, robust frameworks for monitoring engagement and reporting. We have a series of blogs on our website that…they actually talk about best practices in various asset classes. I would encourage investors to have a look at those because they’re quite insightful.

Julie: Now, I know Rebecca has a few comments on this too. I know Rebecca has also worked with lots of new and emerging managers. Rebecca, do you have a few more comments on how you might, you know, guide those people who are just beginning the journey?

How to Guide New Managers

Rebecca: Yeah. Absolutely. I think, you know, Anna touched on some great points around the integration piece, and that’s certainly something we saw with the SEC’s risk alert last year, where they had a couple of some common findings and best practices that I’ve seen. And one of the key ones around there was the compliance personnel being certainly suitably upskilled around ESG and actually being integrated into that process and the policies and procedures being robust. And, you know, there being this sort of audit trail which… I know this is Julie’s bread and butter in terms of, like, developing these policies and procedures, but that really is critical in making sure that, you know, any investment decision that you’re making and applying these ESG factors, that you have, you know, a complete, robust documentation trail so that you can see what’s actually happening there, you know, even when you are challenged.

And one of the things that we’re seeing, again, is that the due diligence process from investors is getting more and more onerous around ESG. You know, they really are drilling down and wanting to understand how the practical application of these ESG factors, you know, and it’s the golden rule of compliance. And so, you know, you need to do what you say you’re going to do and make sure it’s appropriately documented. So, getting these policies and procedures in place from the outset are really, really helpful. Obviously, you need to be authentic to your own investment style and your product. But that responsible investing framework is also critical. Yeah, having the right people at the table, you know, who’s on your responsible investing committee. You really do need to have people from, you know, the portfolio management side of things there, as well as your compliance team. You know, if you’d have a responsible investing committee that’s kind of on the back end or made up, you know, just folks from your investor relations team, that’s probably going to look inauthentic to any investor coming in, to making sure, you know, the investor relations team are invaluable research, because they’re going to tell you what your investors are looking for. But it’s really critical to get that framework right. And you’ll see we spent a lot of time at Waystone talking managers who were initially thinking about this and what they should do around it, you know, and putting a plan in place is sustainable and scalable for your businesses is imperative.

Julie: And so I think it’s also interesting to note that the SEC has taken a stance in the context of working with some of our managers over this issue of, if you advertise an ESG product, you need to be sure that you have the metrics behind it to prove that it really is an ESG product, because we have seen some managers go out there and advertise something that wasn’t much in terms of a real ESG product. So, I have a couple of questions for the panelists, you know, including the idea that there are a number of managers that believe it’s difficult to incorporate ESG in their investment products. For example, commodities can be a real challenging area. Although as we transition into a zero-carbon world, and we combat some of the effects of climate change, there are opportunities, for example, carbon credits and water rights. So, becoming signatories to the PRI might be difficult for some managers, however, many will still want to be good corporate citizens and follow ESG. So, we want to talk about how they can manage it at their own firms. So, in other words, if you feel like you just can’t go all the way to being a signatory of the PRI, are there other things that you can do? So, I’m going to ask Anna to comment on that for us.

Anna: Yes. Thanks, Julie. I completely agree with you that for some investment products, the incorporation of ESG may be more challenging than others, of course, but we believe that this is exactly why an asset manager or asset owner would want to join the PRI. And we have to be honest here, there are no perfect answers, it is an evolving field. And we in the PRI we are learning ourselves as the underlying dynamics evolve. But we have an advantage. The PRI has an advantage, and that is that, through the sheer number of signatories, we can see the big picture clearly. And at the same time, we can extrapolate valuable granular insights on how ESG can be incorporated into the different asset classes. We constantly build on our experience and applied practices. And to give you an example, five years ago, we didn’t cover hedge funds, for example, in our research, but as more and more hedge fund managers started to join the PRI, we started looking at the asset class, we added a hedge fund module on our reporting. And at the beginning, that wasn’t scored because we were in the process of collating information to showcase best practices but also fill the gaps with our research. And, eventually, now, we cover hedge funds in our research and in our reporting. And the same applies with other investment products. For example, we recently published the technical guidance for sovereign debt and venture capital.

Inevitable Policy Response

So, you mentioned that some investors might be reluctant to join us, but they still want to be good corporate citizens. But, for us, it’s not about being a good corporate citizen. It’s about acting now to protect your portfolios, manage risks, and, of course, enhance values, which is ultimately investors’ goal, because we know that climate action will create substantial shifts in the global investment needs, driving down demand for assets that increase emissions and driving up demand for assets that avoid or reduce them. And all that is fleshed out in detail through our flagship project, the Inevitable Policy Response. It is a high-conviction policy-based forecast, which suggests that policy response to climate change will be forceful. It analyzes the implications for various sectors, such as energy, agriculture, and land use, and identifies key sources of climate policy-driven risk in these sectors, but, of course, identifies also the opportunities for investors. And I would encourage investors that haven’t looked at it yet to have a look at the data and the reports on our website, because, you know, they may find that perhaps they can apply those forecasts and the data to their portfolios and to be prepared and ahead of the climate action that will come into force eventually.

Julie: So, I know that Rebecca has a few other ideas on this as well, including some issues with the global supply chain. And, Rebecca, do you want to comment on a few other ideas that you have on this subject?

Rebecca: Yeah. So, I think just to comment on Anna’s point about these strong regulatory tailwinds, you know, ESG and responsible investing has been driven by investors. But now, there are some very, very, you know, hurricane force regulatory tailwinds coming. You know, obviously, we’ve seen the SEC’s climate disclosure rule being proposed recently, which is a huge step. In the EU, we’ve seen SFTR. You know, in Hong Kong, the SFC is also taking steps around climate disclosure. And, again, in Japan, there’s the recent sustainability report. The regulation is coming, and so it’s important that managers act. So, this is very much real. And I think you’ll see the focus on climate change, I think there was a bit of a worry off the back of some of the geopolitical events at the moment, that it would be on the back burner. You know, I’m an optimist by nature. I think you’ve seen this huge fund, like, a huge inflow of funds into climate solutions at the moment. You know, a number of the funds that we’re talking to in management fund are, you know, energy transition funds.

We’ve seen some very large established managers, you know, raise billions of dollars for climate-focused solutions. This is huge. And this capital is needed to fund this transition. And I think there’s been this hesitancy because traditional energy has always been much cheaper. And now, as a result of some of the geopolitical events that we’ve seen, you know, alternative sources, you know, are looking cheaper, and they’re looking for better opportunities. And so, I do think there’s some great investment opportunities that we’re going to see as a result of that. And on the commodity side of things, again, you know, commodities prices are high at the moment, but, again, there’s some great opportunities out there, you know, in terms of, like, carbon credits, and water rights. So, I think, you know, one of the things I’ve always prided myself in working in asset management industry is incredibly entrepreneurial. And I believe the industry has a huge part to play in solving some of these long-term solutions, problems for others.

Julie: So, I agree, I agree, I think we’ll see how the… I think that one of the biggest movers and the effort, in general, will be the asset management industry. People tend to listen to people who fund them, you know, over all others. So, one of the things I think is really interesting is that, you know, we at Waystone work with quite a few private equity managers. And one of the things that we see people struggle with is the principle of something called active ownership. So, depending upon the strategy, there are some perceived challenges around how to do this well, how to be an active owner of an asset. So, for instance, private equity managers with very large stakes in portfolio companies, they hold a lot of sway over those companies, and they have a lot of influence over how those companies conduct themselves, where, for example, if you were a quant manager, and you owned a small amount of a company for a short period of time, or a fixed income manager, you don’t necessarily hold that much sway over the companies. So, one of the questions for Anna is how have you seen managers effectively apply the principles of active ownership?

Principles of Active Ownership

Anna: Yes. It’s a great question. Effective active ownership is ultimately about using the right combination of levers to effect change in portfolio companies and being prepared to use them forcefully where relevant. In listed equity, for example, company engagement and voting are still the main tools investors use to influence ESG practices. But preparedness to escalate is becoming a more distinguishing factor between managers’ active ownership offerings, with leaders having clear escalation policies in place, and that would be enlisted equity, filing of shareholder proposals, and voting against board members at ESG loggers. In private markets, as you mentioned, investors are able to exercise influence more directly. With other asset classes, investors are developing other ways to influence portfolio companies, such as the deny that engage equities approach or through collaborative stewardship initiatives. Of course, engagement with other decision-makers, such as policymakers and standard setters, is also becoming prevalent among active owners.

And, finally, I’d say, more generally, leading investor stewards are beginning to evolve from an approach that solely analyzes ESG risks and opportunities on a company-by-company basis to one that also assesses systemic sustainability outcomes which threaten portfolios as a whole. And we offer this guidance because, as I mentioned on my presentation, we have a stewardship team that does exactly that, produces case studies addressing a number of issues across the different asset classes. And, finally, what I would like to mention is that we are about to launch a collaborative initiative for investors to address human rights and social issues through the stewardship activities. And, essentially, we will offer the platform for investors to come together and collaborate and engage with portfolio companies on various important issues, such as diversity, equity, and inclusion or health and safety.

Responsible Investing Trends

Julie: So, I’m very interested in the trends. So, I think what trends do you see in terms of investor priorities on responsible investing? I know, Rebecca, you’re working with managers every day on these issues. So, how do you expect to see the priorities evolve over the foreseeable future? And then how can managers be best prepared to meet those needs, do you think?

ESG Investing

Rebecca: Yeah. It’s a great question. And I think, you know, the point I made before around sort of ESG due diligence becoming sort of more onerous. And that, again, is obviously being driven by the investors having to report to their own internal stakeholders. You know, if you think about an insurance company, you know, ESG investing aligns nicely with most of their own sort of internal priorities. You know, European tea insurer, obviously, you know, the property impact of hurricanes it’s huge. And, you know, that’s something that you’re looking to mitigate. You know, as a life insurer, again, you know, some of the issues around water scarcity, I read a piece of research recently where they said that, you know, we could well see the displacement of 700 million people globally as a result of water scarcity. This has huge economic impacts and impacts on an insurer. So, you can see why they’re looking at this, you know, more holistically. And, again, even, you know, we have this sort of large pension deficit that we’re trying to fund. And, you know, ESG, investing is more of a long-term investment. And, you know, I fundamentally believe that it is important and it is something, you know, that people want to invest generally in good companies. It is something that’s quite fundamental. And something, you know, we’ve seen recently, I think there’s a piece of Bloomberg research that showed that there’s around a third of investments are in ESG funds at the moment.

So, you’re seeing this huge trend from an individual perspective that people want to invest in ESG products. From a practical standpoint, and, you know, the way we’re seeing this evolve is often, you know, large institutional investors are asking for quite comprehensive ESG side data provisions. And with that, obviously, there’s a lot of additional reporting that’s needed to make sure that the managers have the tools and the abilities to collate that data and actually report back and meet their investor needs on this. So, I think that’s going to be an area that’s going to continue to improve. And we’re seeing some convergence in some of the global standards, which has been welcome. Hopefully, we’re going to see some convergence in some of the terminology used globally, which, again, will be welcome. Yeah, and then there’s a lot of improvements that are happening around data to allow managers to help formulate these decisions. Obviously, some of the new disclosure rules that are been mooted will improve the quality of that data, you know, and allow managers to make good decisions around which portfolio companies to invest in.

Climate Change

Julie: Now, I know, Anna, you had a few ideas on the trends that you’re seeing at the PRI as well. Do you want to spend some time talking about what you’re seeing in terms of trends?

Anna: Yes. Absolutely. First, climate change remains at the center. I mean, there’s no doubt that everyone’s laced on both policymakers and investors convene around net zero agendas. And in the run-up to COP26, we saw commitments on key topics. Now, we believe that we are more in the implementation phase where certain targets and accountability for those targets will be the investors’ priorities. And, at the PRI, through various work streams, we are supporting investors implementing net zero.

Biodiversity & Nature

Second, of course, biodiversity gathers momentum. We see that protecting nature catches up with climate on the global policy agenda. For example, we have already started talking about TNFD, the Taskforce on Nature-related Financial Disclosures. The draft framework has already been launched and is out for consultation. Diversity, equity, and inclusion, and wider human rights and social issues are being added on investors’ priorities, especially over the last two years. We will be working on a project on decent work. The just transition piece is also important, as well as ESG integration in emerging markets. So, another key trend, and I know that Rebecca touched base a little bit, and I’m sure that we’ll hear more from Freya, another key trend will be simply remaining on top of regulatory change. A lot of changes happening and keeping abreast with those changes will be key for the next few years. And, finally, a trend that we were hoping to see is signatories considering more sustainability outcomes in their investment decisions. The PRI strongly encourages signatories to make more efforts in this direction and ultimately think about how to save those outcomes to have these positive contributions to the world that we live in.

UN PRI’s Policy Priorities

Julie: So, thank you so much for that, Anna. I think Anna and Rebecca have really kind of filled us in on a lot of things that I think are going to be moving in the next few weeks and months and years. Now, for Freya, public policy critically affects the ability of institutional investors to generate sustainable returns. Can you spend some time with us on what the UN PRI’s policy priorities are and how you see the regulatory landscape changing?

Freya: Yes. Absolutely. As the policy team track developments and growth of financial policy instruments around the world, one thing becomes very clear to us, governments and policymakers are becoming increasingly concerned with sustainable finance. And we only expect this to continue to grow. We mentioned the inevitable policy response earlier. Each region is very different in terms of the different catalysts for policy change. But a key driver, as Anna said, is undoubtedly the increased awareness around climate change in recent years. We can look at the way that PRI conducts its policy work in two ways, so globally and then at a regional or country level. And at a global level, we view the PRI’s main policy priority as supporting the creation of a regulatory environment that really fosters sustainable finance and enables real-world impact. And we engage in public policy issues where it is relevant to our six principles and mission, as Anna was speaking about earlier. And we do this through a number of tools. We conduct public policy analysis. We deploy a number of reactive and proactive methods of engagement, including bilateral conversations with policymakers, responding to public policy consultations, which we also encourage our signatories to do. We publish our own analytical reports and roadmaps so our stakeholders can use it as a point of reference.

Concluding Remarks

We work on both country and global-level issues, as I mentioned, and one of the most important things that we are doing kind of adjacent to our work is ensuring that all the new regulations and instruments are interoperable with one another so that we don’t have unduly burdened financial actors with disjointed reporting requirements. We want to make sure that they’re compatible with one another and they are, to coin the expression, singing off the same hymn sheet. We’ve also been involved in the development and implementation of a number of taxonomies that are being implemented globally. And a taxonomy can be thought of as a tool to help investors and stakeholders identify what kind of activities can be considered environmentally or socially sustainable, and some taxonomies, such as the taxonomy being developed in the EU, set performance thresholds, which are referred to as technical screening criteria. Ensuring the credibility of sustainable investment products and strategies is really, really critical to building trust and avoiding greenwashing. Taxonomies also being developed in other areas of the world, including the UK, Southeast Asia, and Latin America. I’m sure you can imagine, it’s really important that these taxonomies are compatible with one another as well so that investors are on the same page when they’re classifying these investment activities. And the PRI and other of our peer organizations are also conducting work to ensure that these frameworks are interoperable and compatible.

At a country level, it’s a completely different kettle of fish. Our priorities are really shaped by the nuanced needs of the local financial market and also the policy environment. And just as an example, the UK, who held the COP26 presidency this year, has been also one of the first nations to require mandatory climate disclosures by financial actors as guided by the Task Force for Climate-related Financial Disclosures, which we also known as the TCFD. And this has really been a key priority for the UK team. The team have supported the rollout of these requirements by engaging with the regulators and also engaging with the task force itself. The TCFD is really there to develop universal consistent climate-related financial risk disclosures for financial actors. And in the U.S., some of you may have heard about the new landmark proposal for climate disclosures as set out by the Securities and Exchange Commission or SEC. This is also based on the framework of the TCFD, and the same is true for proposals on disclosures from the Monetary Authority of Singapore and the Hong Kong’s Financial Conduct Authority. And the PRI reporting framework is actually based on the TCFD framework as well. So, it’s really an intervention to harmonize reporting standards and kind of get investors singing off the same hymn sheet as I mentioned earlier. And the way we try and work simultaneously with regulators and investors at the same time so the regimes can be successful.

We’ve been working with investors and regulators on the implementation of the Sustainable Finance Disclosure Regulation, or SFDR, introduced by the European Commission, and it came into effect last year. SFDR set out to increase transparency by requiring disclosures by financial actors on how the ESG factors are integrated at both the entity and product level. However, as with many new instruments and policies and its nascent stages, the introduction of SFDR has created questions and challenges for the investment community. So, the PRI has set out to try and work with our signatories and the commission to ensure that it’s implemented effectively, and it achieves its intended outcomes. You can probably imagine; it’s been a really busy year for us so far in 2020 as things are…policy instruments and financial regulations just continue to grow and grow exponentially. But we also have to kind of maintain this reactive capacity to ensure that we’re able to address real-world and current issues as and when they happen, issues that we foresee that will affect our signatories.

And, for instance, the team recently published an article on the relationship between climate policy and recent shifts in the geopolitical landscape in Europe. It’s really important that the PRI actively supports its signatories and policy intervention while this kind of things are happening. Lastly, it’s really worth saying that the PRI encourages its signatories to participate in policy activity. We believe that signatories can play a really important role in shaping their own regulatory ecosystem as it develops so rapidly. So, we always welcome outreach and questions from our signatories, so do get in touch if you’d like to speak further about any of the policy issues we’ve discussed today.

Julie: I want to thank our panelists, Freya, Anna, and Rebecca, for spending so much time with us. As we mentioned, Waystone is a signatory to the PRI, and we are very much in support of the mission of global sustainability and the general ESG principles. So, we look forward to additional, you know, webinars on this topic with our team and with Rebecca, who’s our current head of ESG. And thank you for spending time with us today.