Principles for Responsible Investment

Hope you are having a great week and welcome back to our brief thoughts on ESG.  This week I’d like to briefly discuss what are the Principles for Responsible Investment, who has signed in Mexico, and whether we think it makes sense to become a signatory.

What are the Principles for Responsible Investment?

According to PRI, the six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice. They were developed by institutional investors in a process convened by the United Nations.  The idea is that investors over time will evaluate the principles to improve them and guide the industry to uphold the best possible standards of fiduciary duty to its investors.

The commitment of signatories to these principles, includes:

1. Incorporate ESG issues into investment analysis and decision-making processes.
2. Be active owners and incorporate ESG issues into ownership policies and practices.
3. Seek appropriate disclosure on ESG issues by the entities in which they invest in.
4. Promote acceptance and implementation of the Principles within the investment industry.
5. Work together to enhance the effectiveness in implementing the Principles.
6. Report on their activities and progress towards implementing the Principles.

For each one of these principles, PRI suggests a series of possible actions and levels of commitment.

Rights and obligations for signatories 

Signatories publicly commit to responsible investment. The biggest benefit to this is that it sends a clear message to investors and the market in general while forcing some discipline on the investment team in charge of the ESG integration. Additionally, PRI has a series of resources for signatories (like reports, data, events, etc.).

The only mandatory requirement, other than paying an annual fee which varies according to the signatory’s size (it goes from £469 to £8,609 per year), is to publicly report on the responsible investment activity through a pre-set PRI framework. Again, while this clearly opens the strategy and responsible investment actions to more public scrutiny, we believe it makes investors really think through their ESG integration process.

Signatories in LatAm and Mexico?

Three groups can become signatories of the PRI: asset owners, investment managers, and service providers. For details on where a given institution is classified, the PRI offers its sign up guidelines. The three-step process initially is relatively simple (sign a declaration form, fill an application, submit an org chart). And somewhere between the 12 to 24 months after signing the signatories need to submit their first report on responsible investment.

There currently are 12 signatories in Mexico (8 investment managers, 4 asset owners), 48 signatories in Brazil (27 investment managers, 14 asst owners, and 7 service providers), and 12 signatories in LatAm ex-Mexico and ex-Brazil (9 investment managers, 1 asset owners, and 2 service providers). This compares to 484 signatories in the US or 410 signatories in the UK and Ireland alone. Clearly LatAm has much to do regarding responsible investment commitments.

Mexico – UN PRI Signatories

Source: PRI

Is it worth it?

It depends.

There are more than 20 stewardship/ESG codes that encourage responsible investing worldwide. The UN’s PRI is possibly the first and definitely the best-known ESG code globally. Additionally, the PRI organization offers a lot of resources for signatories that are interested in taking advantage of them. Considering this, the side benefits from doing all the work to fill the PRI reports (including but not limited to really thinking through the ESG integration strategy), and the public statement that becoming a signatory implies, we think it is worth it for an organization that is truly committed to take ESG integration far.

At the same time, since the actions that are recommended for each principle are both voluntary and aspirational, some people think you can become a signatory and then do nothing. To be clear, we believe organizations that are not truly committed to ESG integration shouldn’t become a signatory just for the sake of being a signatory (and the publicity this brings). Not only is this against the basic principle behind the creation of this kind of initiatives, but also it’s not something that will work for long. While investors at this point are still relatively lenient with ESG integration compliance, we believe eventually there will be more scrutiny. At that point, signatories that aren’t truly doing their homework will probably loose investors’ trust. Not mentioning that the UN PRI organization itself is trying to weed out signatories who are not truly applying the principles (in 2019 alone 10 signatories were deleted for failing to report the required data).

Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly.

Regards,

Marimar

Partner, Miranda ESG

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