The United Nations-sponsored Principles for Responsible Investment (PRI) has begun formal procedures that could delist up to 10% of the more than 2,000 asset owners and managers who have promised to be responsible investors but are not living up to PRI minimum standards.

In the past, PRI members could be delisted for one of two reasons: not paying their dues or not filing yearly reports detailing how they invest through a lens that looks at factors such as sustainable environmental practices or good corporate governance, PRI Chairman Martin Skancke told CIO.

“Now there is a third thing,” he said. “You pay your fees, your report, but you’re not doing anything.”

Skancke said over the past several years, a large number of US investment managers have joined the PRI and agreed to be responsible investors, but there may be mixed motives.

“The large US investment managers are taking this very seriously, but I think maybe more because they want to attract European institutional investors who care about this than the US institutional investors who in many cases care not so much,” he said.

The chairman wouldn’t discuss which companies could be delisted. He said those in danger of being delisted were notified earlier this year and will be given two years to show the PRI they are committed to responsible investing before being delisted. The delisting will begin in April 2020.

“I think this is important for the legitimacy of the PRI,” said Skancke of the delisting process.

Sources connected with PRI, but who are not publicly able to discuss the matter, said it is money managers, mainly in the US, who are in danger of being delisted.  

Officials of London-based PRI first proposed delisting efforts in 2015, but the process did not formally begin until this year. Ultimately, Skancke, the former head of the asset management department of the Norwegian Ministry of Finance, said it’s up to institutional investors to take the lead in environmental, social, and governance (ESG) investing.

“Responsible investment has to be driven by asset owners because it’s only if asset owners are engaged that the investment managers will have proper incentives to take this seriously,” he said.

Skancke said many PRI asset owner signatories have stepped up and will only do business with investment managers who are PRI signatories.

“So this is a good thing because it’s a way of promoting responsible investment practices,” he said. “It obviously also creates an incentive to sign up to the PRI even if you’re not really seriously interested in doing something.”

PRI documents show that asset managers and owners must invest at least 50% of their portfolio using responsible investment principles to comply with PRI rules. They also must have formal guidelines on at least one aspect of responsible investing: environmental, social, or governance. The asset managers and owners must also have designated personnel responsible for implementing responsible investing.

Skancke said he understands that not all PRI signatories may fully understand how to implement an ESG program.

“I think we need to recognize that we have some large signatories who are just at the start of a journey,” he said. “They don’t have a lot to show in terms of what they’re doing, but they have good intentions.”

In those cases, PRI is ready to work with the signatories, Skancke said.

“We can bring in our teams who can sit down with you, we can help you,” he said.  “And so far, the response to that, to the ones who have started now reaching out, has been positive.”

PRI signatories include many of the world’s largest asset managers, including BlackRock, Vanguard, and PIMCO.  In the US, they also include major asset owners such as the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).

Missing, however, are key pension systems that practice responsible or ESG investing.

Skancke, who had been in charge of the more than $800 billion Government Pension Fund in Norway, would not comment on specific institutional investors. He said that not all asset owners are comfortable with the transparency requirements spelling out responsible investments.

In fact, a review of PRI signatories by CIO shows noticeably absent are large sovereign wealth funds in the Middle East.

“I think we have, for instance, some of the large funds in the Middle East,” he said. “They are doing a lot in terms of thinking about sustainability and governance and all of these things, but we haven’t signed them up because I think the transparency requirements don’t really fit with their model,” Skancke said.

He said PRI going forward also wants to highlight positive examples of asset owners and managers practicing responsible investing. At the annual PRI conference in Paris next fall, he said the organization will give awards.

“It’s not just about setting a minimum requirement and kicking out the lowest performers, but also showcasing some good practices in our high performers,” he said.

Tags: Asset Owners, Middle East, Principles for Responsible Investing, United Nations