In recent years the UN Principles for Responsible Investment (PRI) has grown into one of the most significant initiatives in sustainable and ESG investment – boasting over 3,000 signatories from all across the finance sector, alongside an ever-growing portfolio of tools, research, good practices and events aimed at disseminating responsible investment action worldwide. Among our clients in the finance sector, most are either UN PRI signatories already, or are actively considering signing up.
A distinctive feature of the PRI is the obligation for signatories to report annually on their approach to, and practice of, responsible investment – and this is naturally the subject of many of the questions our clients have about the forum. As a PRI signatory ourselves, as well as advisors to many other signatories of all types and asset classes, Sancroft is well acquainted with the reporting requirements.
So when the PRI announced its long-awaited revised reporting framework in November 2020, we knew this would be a matter of great interest. Now that the framework has been formally released, we decided to take a look inside the box and share some of the main changes and highlights.
What is behind the changes to the reporting framework? PRI undertook a lengthy engagement with key stakeholders to understand impressions and expectations of the reporting process, which suggested stakeholders want to ensure that reporting leads to greater accountability from signatories. Put simply: how could the reporting framework be improved to drive real changes in signatories’ approach to responsible investing and the results and impacts achieved?
These improvements are extensive and seek to make the attainment of top scores much harder. The new reporting framework applies to asset owners and investment managers – there has been little change for service providers. The relevant investor signatories will be required to report on their 2020 activities using this new framework, with a deadline of April 29th 2021. One thing that has not changed is that there is a mix of mandatory and optional questions; and answers that will be reported publicly versus internally – although there have been changes in how many and which questions are affected. Signatory reporting is assessed and analysed by the PRI with a score issued per module, so the incentive to put your best face forward remains high.
The main areas of change we cover are:
- Changes in format with more prescriptive answers required
- Answers require greater specificity
- Stronger focus on climate change and climate risk
- More transparency about sustainability outcomes and results
- Specific senior-level accountability for responsible investment
A brief look at each of these in turn will help highlight the key changes signatories can expect to see as they complete this year’s submission:
1. Changes in format with more prescriptive answers required.
There is now much less reliance on free-form answers in the new framework. Instead, answers are largely in multiple-choice format. This may make answering easier in some ways, and it will make the scoring less subjective and more comparable across the signatory base.
This is likely to have the overall effect of making the scoring stricter.
2. Answers require greater specificity.
Questions are less likely to ask about ‘whether’ the signatory takes a particular action, but rather ‘what and how’ they do so. This reflects an expectation that signatories’ activities in responsible investment progress over time and therefore do not assume starting from a low base. An illustration of this shift can be seen through the following example:
- From previous reporting framework: ‘Indicate whether your organisation has identified transition and physical climate-related risks and opportunities…’
- Equivalent indicator in the new framework: ‘Which climate-related risks and opportunities has your organisation identified…’
This will require greater transparency and specificity from signatories as to exactly what their responsible investment activities entail.
3. Stronger focus on climate change and climate risk
It should come as no surprise to our clients that climate change, climate risks and relevant responsible investment activities are coming more clearly into focus – this area has seen rapid development in recent years and is currently one of the most urgent topics of concern – and innovation – in the finance sector. There is also an increased number of disclosures required on climate change, which are mandatory and assessed and the majority of which are subject to public disclosure.
All this means that if climate change isn’t already a key ESG consideration for signatories, it will need to become one with sufficient emphasis in their approach in order to score well.
4. More transparency about sustainability outcomes and results.
The Investment and Stewardship Policy module in the reporting framework includes questions on the specific outcomes of responsible investment activities for the first time, not just aims and intentions, or description of activities alone. This is part of the drive to increase the rigour and meaningfulness of responsible investment approaches and initiatives, to make transparent how signatories are delivering on those aims and address any concerns about window-dressing. PRI has also introduced a voluntary module on Sustainability outcomes, which seeks to gather greater detail about the types of outcomes pursued and achieved. This module in particular will play an important role for those signatories that seek differentiation from peers not just through the robustness of their processes but the real-world impact of their actions. The PRI has also made it clear that this module will be the source for identifying sector and asset class leadership and innovative practices.
All in all, this means signatories will likely need to increase their efforts to measure, document and evaluate the results of their approaches and activities and be prepared to engage with clients and other stakeholders about how well these activities are aligned with their expectations.
5. Specific senior-level accountability for responsible investment.
There is a new mandatory requirement for a statement from senior leadership. Its purpose is to frame the report and provide an overview of the signatory’s approach, achievements and future plans in responsible investment. While this is not taken into account for scoring, the statement – signed or endorsed by the CEO, CIO or similarly senior member of the leadership team – is intended to ensure that responsible investment is addressed at and accountable to the highest levels of leadership in the organisation.
This will strengthen the visibility of ESG within signatory firms and demands from leadership teams to take responsibility for their responsible investment strategy, activities and results.
With the April deadline looming, many investors will find it challenging to come up to speed with a significantly strengthened reporting framework in only a few short months. If you are seeking support on your PRI reporting journey, Sancroft can work with you as a ‘critical friend’ or help you to assess where you can practically improve your approach and your potential score. And as you embed your responsible investment practices, we can help you find ways to tailor your approach to best fit your strategy, delivering more value, and more sustainable results, for your clients. Get in touch to talk about how we can help you achieve your ambitions.
If Sancroft can help you achieve your ESG and responsible investment ambitions, please contact Ivaylo Dimov
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