The damage and destruction brought on by the ongoing long rains has once again cast light on climate change and its effects. For the umpteenth time, environmental issues are again frontline. And as usual, blame gets passed around like the collection plate.
Whether or not you believe in cause and effect, all have to deal with the not-so pleasant reality of floods and famine.
Inspired by these events (or not), likely, the fathers of the United Nations-backed Principles for Responsible Investment (PRI) saw the need for the investment community to play its part.
In summary, PRI works with its international network of signatories to put the six principles for responsible investment into practice which revolve around the environment, social and governance (ESG).
Since its launch in 2006, PRI has amassed more than 3,000 signatories managing in excess of 100 trillion US dollars in assets. But how have these investors fared? Not that well, it seems.
Just four years ago, five investors were delisted from the PRI signatory list, in the first such move by the group for those failing to meet its minimum requirements. At some point, even PRI’s internal audit showed that one in 10 signatories were not living up to their commitment.
In other words, there were signatories who just weren't doing enough and/or were very much there for the marketing (which I suspect is a huge number). They were sort of riding on the brand and riding on what other signatories were doing. Probably, these saw membership as a channel to gain mandates from pension schemes. These errant ones think “P” stands for pretend.
Worse, reports highlight growing evidence that some PRI “compliant” funds have the worst compliance record for environmental rules. The lack of a universal standard of measuring positive impact further makes the whole thing worse.
But to balance, pursuing the ESG agenda comes at a steep cost. Most ESG-driven funds sacrifice performance for compliance. In addition, the system is voluntarily based. This partially explains why most institutional funds are yet to integrate ESG factors into their investment decision-making processes.
To give a local example, despite having the Nairobi Securities Exchange (NSE) ESG Guideline Manual, it’s largely voluntary and hence inconsequential as most players are yet to adopt it. Even the latest report (2023) on the state of corporate governance of issuers of securities does not wholly capture the ESG factor. The subject is treated as a footnote under the broad “Board Operations and Control” category. Explains a lot why it’s hard to implement the voluntary and aspirational set of PRI investment principles.
Not to belabour the point, it’s important that PRI signatories (and its local version) need to do more to ensure members live up to the principles, including to embed ESG-related issues in their investment decision-making. PRI needs to put pressure on these firms to raise their game.
In implementing these rules, they contribute to developing not only a sustainable global financial system but a safer world too. And if they don’t, they should be kicked out of the club. But we know that’s highly unlikely as PRI mainly survives from its membership annual fees.
