CEO ofPrinciples for Responsible Investment Fiona Reynolds sat down with Global Finance at the organization's annual conference last week in Paris to talk about the growing momentum behind ESG in the corporate world.
Global Finance: Can you explain the origins of the Principles for Responsible Investment (PRI) and the work it does?
Fiona Reynolds: The PRI is the world’s leading proponent of responsible investment and we work towards developing an understanding of the investment implications of environmental, social and governance (ESG) factors.
Our signatories to the six principles of responsible investment—who commit to the incorporation of ESG factors into investment analysis and seek disclosure to that end from entities in which they have invested—represent an increasingly significant constituent of the international investment community, able to influence corporate dynamics and government policymakers.
The PRI was established in 2006 in tandem with the launching of the six principles at the New York Stock Exchange that year as part of an initiative launched by former United Nations (UN) Secretary-General Kofi Annan. We are supported by—but not a part of—the UN and are truly independent.
We act in the long-term interests of our more than 2,500 signatories, who collectively represent over $86.3 trillion in assets. The PRI operates in the long-term interest of its signatories and moreover of the financial markets and economies in which they operate and ultimately of the environment and society as a whole.
GF: ESG-conscious investing is often regarded as running counter to an investors fiduciary duty to maximize returns. Is this correct?
Reynolds: We encourage investors to use responsible investment to enhance returns and better manage risks and empirical research has demonstrated that investors who own portfolios constructed according to ESG factors actually outperform market indices in the long run.
There has been increasing cognizance of this fact in the international investment community over the past few years and for this reason the corporate mindset is moving into alignment with ESG.
We had confirmation of this shift in mindset recently when the influential US Business Roundtable stated that its companies must be run according to the interests of stakeholders over and above those of shareholders. That represented a radical shift in thinking.
GF: How has the PRI helped influence government policy regarding ESG?
Reynolds: We’re seeing a move from sporadic adoption to more comprehensive sustainable finance policies globally, particularly in the developed economies, although increasingly, particularly with regard to environmental policy and the need to meet the targets of the 2015 Paris climate accord, those economies are moving into alignment.
The PRI has established that across the world’s 50 largest economies, there are more than 500 policy instruments and 730 hard and soft law revisions that support investors in considering long-term value drivers, including ESG inputs.
Half of these have been introduced in the last three years, as the ESG movement has steadily gathered a seemingly relentless momentum.
GF: What will push that momentum further?
Reynolds: A significant project unveiled at our recent annual conference in Paris—the largest ESG conference yet convened with more than 1,700 delegate from across the world—was the Inevitable Policy Response (IPR) which aims to prepare financial markets for climate-related policy risks.
This pioneering project forecasts that by 2025, as the realities of climate change become unequivocally apparent, there will be policy responses from government which will be forceful, abrupt and disorderly.
Part of the logic underlying the IPR is that costs are falling rapidly in the renewable energy sector and that for most countries the opportunities offered by renewable electricity—representing a cheap, local and independent energy source—are huge.
Those economics will drive the transition away from fossil fuel-generated energy as well as environmental factors. That reality is being incorporated into government thinking and the IPR is something investors must be profoundly aware of going forward.