PRI exec harnessing the power of $45 trillion

The woman at the helm of the United Nations-supported Principles for Responsible Investment and her team are on a mission to get asset owners to use their influence — and trillions of dollars in collective assets — to bring responsible investment into the mainstream, flex their engagement muscles and ensure their socially responsible behavior is used for good.

“Investors have an incredible amount of power,” said Fiona Reynolds in an exclusive interview with Pensions & Investments at the organization's office in London. “They have the ability to effect huge amounts of change, and they just need to come together and act.”

The PRI was formed in 2006 with six principles covering environmental, social and governance issues. The PRI initiative is associated with the United Nations Environment Programme Finance Initiative and the United Nations Global Compact. Its goal is to educate signatories on the implications of sustainability for investments and help them incorporate the principles into their investment decision-making and ownership practices. It is 92% funded through fees from member organizations — it has almost 1,300 signatories, ranging from asset owners to money managers and professional services firms representing a collective $45 trillion. The remainder is funded by profits from its annual conference and “small grants here and there,” Ms. Reynolds said.

The organization covers issues such as hydraulic fracturing, employee relationships and corruption. “We research and identify the key issues in that area, find leaders and laggards (in terms of companies), and try to bring (laggards) up to scratch. Our thing is not to target the issue itself, but get better disclosure so that investors can make informed decisions about the investments that they make. We do this on a collaborative basis: Money talks. One pension fund may not get a reaction — but get $30 billion talking to (a company), and you will start getting attention.”

And a recent study showed just how important sustainability and environmental, social and governance issues can be to investment. From the Stockholder to the Stakeholder, a September paper by Gordon Clark, director, and Michael Viehs, research fellow at the University of Oxford's Smith School of Enterprise and the Environment, in association with Arabesque Asset Management Ltd., examined 190 studies, reports and books. The study said 88% of that research showed solid ESG practices result in better operational performance of firms. And according to 80% of the studies, stock price performance is positively influenced by good sustainability practices.

Ms. Reynolds joined the UN PRI as managing director in February 2013, armed with more than 16 years of experience in the pension sector, including six years as CEO at the Australian Institute of Superannuation Trustees. She said her time spent with the association, encouraging participants in Australia's superannuation plans to invest their hard-earned cash for their retirement, was somewhat tainted by 2008's financial crisis and the effect it had on savings. “That led me to want to make the underlying markets more transparent, more efficient. And on top of that ... with the weight of money that pensions have, I truly believe that pension funds can make the world a better place. There is no point having pots of money if there is no planet worth retiring in,” she said.

And as the end of the first decade of the organization's existence nears, reviewing what has been done and improving for the future are tops on Ms. Reynolds' agenda.

“We have just put together our three-year strategy,” she said, which covers April 2015 to April 2018. The plan is based on feedback from executives and firms across its signatories, through a global survey, and is now open for comment from signatories. One focus will be on getting asset owners not only to flex their engagement muscle with the companies it invests in and with, but also to keep their own house in order.

“How do we drive long-term behavior? We have found through some of our reporting that (pension funds) are quite good with RFPs, requesting responsible investment, but are not so good about embedding it or monitoring it in the actual contract. That is about going to the next level — we are looking at the characteristics to help people make up a good, long-term mandate — we are working on that now to find something that could become good practice, to maybe change the way mandates are written,” said Ms. Reynolds.

But in doing that, one thing of which she is acutely aware is that in order to remain effective, the PRI must move away from its “one-size-fits-all” approach.

“We have (institutional investors, money managers and other signatories) at different levels with their progression about responsible investment,” she said. “We have very large and small pension funds, large and small managers, and those that are just starting to think about responsible investment — and then those who were in it before there was a term for it.”

“We have in place good fundamentals.” But the work now is to develop that base into something that is relevant to all signatories, she said.

“We found in our survey that (the longer a signatory has been with the PRI), satisfaction went down. The reason is that (for those) starting out we have great tools — but we have to continue to engage those that are leaders. Some of the bigger investment managers and pension funds have more staff and resources than we have — in some ways they need us less, but we need them.”

The goal, she said, is to move beyond awareness of responsible investment and of the PRI and its principles. “As we get into our 10th year, (we) sit back and think, "Are we where we want to be? Are we having an impact on the market?' The PRI can say yes ... in the growth of responsible investment over the past decade — the PRI has played a great deal in that,” she said.

“But one of the aims is to see responsible investment as mainstream.” Investors and managers, she said, still see it as niche, and sitting alongside a set of investment strategies. “We see that responsible investment shouldn't be a separate product — it should be integrated into everybody's investment processes. We are not saying that ESG risk is more important than others; but it should be in the risk bucket. We want to be (at a point) where we just have investments — not responsible investments separate. We have very lofty ambitions.”