Institutional investors are facing increasing pressure to invest responsibly and consider Environmental, Social and Governance (ESG) factors in their decision making processes.
Institutional investors have a duty to act in the best long-term interests of their beneficiaries and as it is now well known that ESG issues can affect the performance of investment portfolios, ESG must therefore be considered as part of investors’ fiduciary duties.
The world’s leading proponent of responsible investment, the United Nations backed Principles for Responsible Investment (UN PRI) works to understand the investment implications of ESG factors and assist institutional investors incorporate ESG into their investment practices.
Developed by investors for investors, the UN PRI is of the view that long term value creation relies on an economically efficient, sustainable global financial system. It believes that such a system rewards long-term, responsible investment while benefiting both the environment and society as a whole.
Globally, there are more than 4,000 signatories to the UN PRI from over 60 countries, representing a majority of the world’s professionally managed investments and over US$120 trillion of assets.
UN PRI provides these institutional investors with a menu of possible actions that they can select to assist in incorporating ESG considerations into their investment practices.
As for companies that are seeking to attract investment dollars, the widespread global adoption of these principles has only heightened the need to factor ESG considerations — such as meeting global climate goals, how workers are treated, board structure and executive pay — into business practices.
Therefore, it is worth gaining a thorough understanding of the United Nations’ six Principles for Responsible Investment and how institutional investors are being guided by these principles in deciding where they allocate investment capital.
The 6 Principles of Responsible Investment
The six Principles for Responsible Investment were developed by an international group of institutional investors to reflect the increasing relevance of ESG issues to investment practices. The process was convened by the United Nations Secretary-General.
While these principles are voluntary and aspirational, as signatories to the principles, the investors have publicly committed to adopt and implement them.
Here are the six Principles that institutional investors can commit to when incorporating ESG issues into their investment practices:
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
- Principle 6: We will each report on our activities and progress towards implementing the Principles.
To be best placed to attract and secure capital from institutional investors that are signatories to the UN PRI (and other investors that value ESG as an investment metric), companies must do all they can to disclose their ESG metrics and present them in a digestible form.
This falls under the UN PRI’s“Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest” where UN PRI signatories are advised to:
- Ask for standardized reporting on ESG issues,
- Ask for ESG issues to be integrated within annual financial reports,
- Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives,
- Support shareholder initiatives and resolutions promoting ESG disclosure.
Socialsuite’s ESG solution helps companies establish corporate ESG reporting and demonstrate ongoing disclosure of their ESG progress. It helps companies report on their progress against a standardized framework: the World Economic Forum’s Stakeholder Capitalism Metrics, which provides a comprehensive system of corporate ESG disclosures.
Adopting such measures appeals to institutional investors who are seeking clear and transparent standardized ESG reporting.
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