Margaret L. Kuhlow, WWF Finance Leader, looks ahead to PRI in Person with a review of the state of responsible investment, and calls for greater focus on impact.
Next week, Paris will welcome international investors at PRI in Person, an annual gathering focused on sustainability and hosted by the UN Principles for Responsible Investment (UN PRI). In the dizzying alphabet soup of sustainability-focused platforms, UN PRI represents the single largest collection of investors, now boasting almost 2,400 signatories with nearly $90 trillion in assets under management.
A growing concern
Over the week, we will hear a lot about progress in sustainable investing which has been growing apace, albeit from a low base. As measured by the Global Sustainable Investment Alliance (GSIA), between 2016 and 2108, global sustainably invested assets grew by 34% to a total value of more than $30 trillion in the major markets tracked by GSIA’s bi-annual report.
The majority of these assets — about $20 trillion — are managed with a relatively light touch screening approach that filters out investments in companies or industries such as tobacco, arms, or coal that are not viewed as ‘sustainable’ in an environmental or social sense.
Alongside, more proactive sustainability and impact investing is growing. The Global Impact Investing Network (GIIN) estimates that impact investing — ‘investment that is made with the intention to generate positive, measurable social and environmental impact alongside a financial return’, sometimes referred to as triple bottom line investing for its focus on people, profit and planet — is valued at over $500 billion in assets.
Those are big numbers, and growth rates are equally impressive, probably driven jointly by increasing attention to sustainability issues among investee companies and increasing demand from the clients and ultimate beneficiaries of those assets, like family foundations and pension holders.
The nature of risk
Nevertheless, we’re still experiencing a warming climate and its destructive impacts, and an alarming decline in the natural systems that support life on Earth and provide food, freshwater, medicines, as well as in the natural landscapes that bring us joy. In fact, scientific consensus is building around risks to business from the loss and degradation of nature, or ‘nature-related risk’. And a forthcoming report from WWF highlights the critical interaction between nature loss and climate-related risk.
Why is it that responsible investment is on the rise while the negative impacts of our economic activity are also increasing? Is it because there’s a time lag between investment and impact and that responsible investing is still relatively young? Maybe. Is it because activities that are labeled as green, sustainable, or responsible, are not? Possibly. Is it because responsible investing remains a small fraction of the global investment universe and the vast majority of investors still support activities we know are damaging the environment? Almost certainly.
Making responsible investment the default approach
The Principles for Responsible Investment are just that: a set of six Principles. Signatories commit to incorporate environment, social, and governance issues into decision-making; to be active investors; to press for disclosure; to push for broader up-take in the industry; to collaborate to increase effectiveness; and to report on progress to implement these principles. The principles do not, however, stress the measurement or reporting of the outcome or impact of their application.
While there are impact investors who are signatories to the PRI, and also impact-related initiatives within the PRI, like the current review of legal frameworks to consider impact alongside or as a part of fiduciary duty, the Principles themselves seem to assume their application will naturally result in positive (or at least less negative) impact. It’s time to question that assumption.
To meet growing demand for better metrics, there has been an increase in efforts to more credibly measure impact with standardized definitions — from the work of the GIIN in their updated IRIS+ taxonomy and the International Finance Corporation’s (IFC) new Operating Principles for Impact Management, to the extensive taxonomy work that is part of the European Commission’s Sustainable Finance Action Plan and other international standards currently being developed for green bonds and loans (ISO 14030), reporting investments and financing activities related to climate change (ISO 14097), and sustainable finance (ISO/TC 322).
In pursuit of impact
It will be interesting to see how much focus there is next week among PRI signatories on more credible impact measurement and reporting. It’s also time for them to step up advocacy both with their investee companies — shout out to ClimateAction100+ — and through the broader investment industry, consistent with the Principles.
If responsible investment is profitable, why isn’t it spreading more quickly? What should signatories be doing to bring the rest of the industry along? Are there supporting regulations that are working or need to be tried? Are there disincentives such as fossil fuel subsidies that need to be shaken out of the system? Or, do we need more supportive initiatives to facilitate the transition to a more sustainable economy in which to invest?
Here are some suggestions to move things forward.
- Support the G7 Metz Charter on biodiversity and advocate its implementation.
- Advocate the disclosure of nature-related impacts and the establishment of a Task Force for Nature Impact Disclosure, modeled on the experience of the Task Force for Climate-related Financial Disclosure. Just as investors need more and better disclosure to manage their climate risks, investors should also be aware of the large and growing nature-related risks to which they are exposed, at business, industry, and economy-wide levels.
- Utilize the tools available to improve decision-making around environmental impacts of investments — including the new SUSBA tool, which can help analyze the sustainability of investee banks, and the improved Water Risk Filter 5.0, which can help analyze investment exposure to the increasing physical risks of climate change.
- Join the call for a New Deal for Nature and People to protect and restore nature by 2030, including halving waste and pollution, as well as greenhouse gas emissions, and transitioning to sustainable food production and consumption.
There should be some backslapping next week to celebrate how far responsible investment has come. It is a critical movement in the transition to the economy we need. There also needs to be a more hard-eyed look at the impact responsible investment is having, and collective agreement to push for much more action at a greatly increased pace. We need business unusual more than ever.