Against the backdrop of an avalanche of regulatory disclosure requirements (e.g. SFDR, EU Taxonomy, sustainability benchmarks), the new PRI Reporting Framework published in November also raises the bar for the finance industry and helps address some of the concerns around greenwashing.
In our view, the new Reporting Framework sends a strong signal to the industry about evolving expectations of responsible investment in different asset classes. We highlight three significant changes in the UNPRI reporting requirements, their implications for individual PRI signatories and how we think it will contribute to driving meaningful change in the industry.
1. Managing ESG risks is no longer enough. Asset managers are now also expected to manage the impacts of their investment activities.
Given that the focus of the last 10-20 years has been squarely on ESG integration (and the underlying assumption that this would primarily benefit portfolio performance), this is a paradigm shift. It encourages the industry to embrace a new mindset and consider the impacts of each investment activity on society and on the environment. For PRI signatories, this means that they need to expand their understanding of materiality to consider ESG factors that are likely to be most influenced by their investment activities, as well as ESG factors that could impact financial performance.
By reframing the discussion away from the narrow definitions of impact investing to the broader concept of managing sustainability outcomes, the new PRI reporting framework helps ensure that all assets claiming to be invested responsibly are indeed supported by investment processes that evaluate and manage positive and negative outcomes on the world. This is important as it has the potential to transform impact investing from a niche investment strategy that primarily focuses on financing solution-providers to a mainstream investment approach that addresses global challenges holistically and on a large scale.
2. Focusing on flagship ESG products is no longer enough. Asset managers need to demonstrate how broadly they implement responsible investment across all their investment activities.
One of the challenge of the old reporting framework was to ascertain the extent to which specific RI practices were embedded across the organization, or only applied to sustainable funds. By requiring signatories to indicate the scope of implementation for many critical aspect of RI (e.g. materiality analysis, ESG integration in valuation and portfolio construction, stewardship activities across different asset classes), the new reporting framework shines a brighter spotlight on the bulk of the assets they manage.
Focusing on mainstream investment strategies will help asset owners understand how good RI practices (often initially developed for sustainable funds) are being transferred across to other investment processes. This is critical considering that, despite the rapid growth of ESG products offerings, the majority of assets continue to be managed in conventional investment strategies. The new reporting framework not only gives signatories the opportunity to describe more specifically how they implement responsible investment in different investment strategies (e.g. passive, quant), it encourages the industry as a whole to demonstrate how existing portfolios are being transitioned to increase their resilience and alignment with long-term trends.
3. Stewardship on its own is no longer enough. Signatories need to show the strategic intent of their stewardship activities and how these relate to investment decisions.
The new reporting framework brings much needed clarification on the ultimate objective of active ownership and how this might differ in different asset classes. Whether the primary focus is to improve the risk-return profile of underlying investments or to improve outcomes, signatories will need to explain how investment activities steer stewardship priorities and how the results of stewardship activities influence investment decisions. They will also need consider how they might engage with policy-makers to create a supportive regulatory environment for practices to improve.
By strengthening these links, the new PRI reporting framework encourages more strategic alignment between the different Principles and the way they are being implemented. It nudges signatories to make sure that their approaches to ESG integration, active ownership, disclosure, public policy and collaboration are effective and mutually supportive.
Seeing the real value behind reporting.
Reporting is time-consuming and often seen as a compliance exercise. But the real value for signatories lies in using the reporting framework as a roadmap of actionable steps that can inform their RI strategy, irrespective of where they are on their RI journey. For instance, it now provides signatories with a useful blueprint to set clear outcome objectives and identify different levers of influence they can use to achieve them.
Providing implementation guidance without being prescriptive is challenging. Offering several pathways for progress to accommodate for signatories’ differences in size and style, without overwhelming or confusing the industry, can be daunting. Transforming finance at scale – and from within – can seem overly ambitious… The new PRI Reporting Framework addresses many of these challenges. Alongside new regulatory requirements, we believe it will play an important role in helping accelerate the flow of capital to more responsibly managed strategies.
At Contrast Capital, we look forward to building on this momentum to support asset owners and asset managers with the next steps on their sustainability investing journey.
