In April 2006, United Nations Secretary-General Kofi Annan came together with a group of some of the largest institutional investors in the world to launch the Principles for Responsible Investment (UN PRI) in New York. The aim was to provide a framework for achieving "better long-term investment returns and more sustainable markets". Five years later Pension Funds Insider looks at the uptake by pension schemes

They came from 16 different countries, at the time representing more than $2trn in assets, and together they created a set of principles that would use institutional investing to make the world 'a better place'. This group of people, facilitated by the UN, consisted of more than 20 pension funds, foundations and special government funds. They were helped by more than 70 experts from around the world and in 2006 came to an agreement on the principles at the New York Stock Exchange.

"These principles grew out of the understanding that while finance fuels the global economy, investment decision-making does not sufficiently reflect environmental, social and corporate governance considerations – or put another way, the tenets of sustainable development," Secretary-General Kofi Annan said at the time.

And he was right. Since then many experts have advocated that institutional investments be used in a way that would benefit all and examples of this theory can be found in many companies and other initiatives.

"It helps us to make capitalism work better," Steve Waygood, head of sustainability research and engagement at Aviva Investors, explains. Waygood was one of the experts who was instrumental in setting up the principles five years ago. He says he sees big positives but that there is room for improvement.

"The principles give us a great assessment mechanism to see how we are doing and how we can improve our activities in terms of sustainability," he says. "They provide a formal mechanism for collaboration, for sharing concerns and finding solutions through each other's practices."

"We must make sure that the 'wrong' thing is a more expensive thing to do," says Waygood. "For example climate change, as an externality is an external cost to society. If lots of companies are externalising that cost then it will come back to the overall cost of our society, as we have seen. So it is in our interest in the long term that what our companies do is actually sustainable, otherwise it will cause costs for the other companies we own, which will overall diminish the value of our own portfolio."

The West Midlands Pension Fund is one of the latest UK schemes to have become a signatory of the principles. But it describes signing up as a "mere formality" as they were already supportive of the UNPRI "since they were formulated, as stated in the fund's SRI".

The scheme has had a positive ESG policy for many years and is an actively investor in this area, they invest for example in sustainable urban development on brown field sites and in alternative energy and water funds. So why become a signatory? Is it merely to show members the stamp of approval?

Waygood agrees that though the success of the PRI can be heard and read everywhere a lot more can be done and that many signatories do nothing more than sign up. "Where it is weak at the moment is in its assessment methodology. It is hugely important but could be better," he says. The PRI Initiative, which helps investors to follow the PRI, recently released a white paper on the matter. 
Waywood points out that is genuinely hard to measure performance in the area, so assessing the impact that signing up to the principles has on investment is problematic, to say the least.

"Many (investors) do not change anything at all," he says.

"They do not change their investments, their data providers, their evaluation models, possibly they do not even change the way they vote at AGMs."

Waygood would like to see more active engagement. There should be more of a process to check engagement, more transparency. For example publishing the outcomes in full as well, not just the input of the questionnaire. "Why do we not ask of all asset owners that they demand of their partners to sign up and hold them accountable?" he asks.

"In 2013 we want to make adhering to the principles mandatory," says Rob Lake, director of strategic development at the UN PRI when speaking to Pension Funds Insider. "We realise a lot more can be done but in terms of how far we have come in five years I would say we are doing well. We have an enormous amount of assets on board, from more than 250 pension schemes, and I would say we are very strong."

And this seems to be the case. The Dutch, the Swedish, the American schemes – as far as giants with buckets of assets go, are signatories. However, on 31 March 2011, the UK had only 26 schemes that have become signatories of the principles in the last five years. And what of smaller schemes? What are the intentions there?

The problem, Waygood explains, is that small schemes are often under resourced and think they have no possibility to sign up: "We do have some small signatories and quite a few are very active members. Our aim is to include them more. We have set up the Small Funds Initiative, specifically for smaller asset owners with limited resources, and this offers collaborations on a global platform that they too benefit from."

"Of course we hope to increase the amount of signatories but over the course of five years I think we can say we are anything but disappointed by the number of signatories. It is all about collaborating and we want to facilitate that in the coming years by proving more services, research and platforms for various types of asset owners from all over the world."

The six basic principles of the UN PRI:

1 We will incorporate ESG issues into investment analysis and decision-making processes.

2 We will be active owners and incorporate ESG issues into our ownership policies and practices.

3 We will seek appropriate disclosure on ESG issues by the entities in which we invest.

4 We will promote acceptance and implementation of the Principles within the investment industry.

5 We will work together to enhance our effectiveness in implementing the Principles.

6 We will each report on our activities and progress towards implementing the Principles.

azeevalkink@wilmington.co.uk

First published 13.07.2011