Sustainable and inclusive: Covid-19 recovery and reform

Executive summary

As communities and businesses around the world grapple with the ramifications of the COVID-19 pandemic, we owe it to our clients and beneficiaries to recover better, which means creating a recovery that is sustainable, inclusive and delivers concrete reforms. For responsible investors, that means they need to raise their games on policy engagement.

A recent Oxford Smith School paper concluded that “progress on climate change will depend significantly on policy choices in the coming 6 months”.¹ Critically, “the right choices could drive a long-term downward trend in greenhouse gas emissions”. The PRI agrees with these sentiments. However, there is a significant task at hand to turn ambition into reality. Research for this report finds that investors significantly underestimate the positive role that the responsible investment industry can play in encouraging policy change. Alongside climate-related issues, there is an imperative to recover in a way that enables a more just and fair society. UN Secretary General, António Guterres said in April that, “People — and their rights — must be front and centre”.² This applies to states, companies and investors. Respect for, and enforcement of, human rights are a precondition of a fairer, more inclusive and resilient future.

This report presents a series of recommendations for investor policy engagement and indicative proposals for action. The PRI intends to develop these proposals over the months ahead, informed by our programmes across environmental, social and governance issues, our signatories’ sustainability objectives, and our implementation objectives.

Our recommendations are based on a seven-part framework that should support investors in pursuing their policy objectives:

• Undertake policy engagement, aligning your engagement and investment objectives.
• Work to policymakers’ timetables, not your own.
• Leverage arguments based on technical expertise.
• Engage at all levels of the policy process, as well as through the media.
• As far as possible, work together and speak with a coherent voice, especially where there is consensus.
• Better understand the relevant dynamics of policy decision-making across committees and groups.
• Be clear about who you represent and how policies impact your investor base.

Responsible investors need to send the right messages, to the right people, at the right time, and in the right way. That means undertaking detailed stakeholder mapping to assess who makes decisions and who has the influence to accelerate change – in short, backing up statements with actions that will encourage policy implementation.

This report sets out three themes as a starting point for PRI signatories in their policy engagement in the post-COVID-19 period:

• The case for a sustainable recovery is overwhelming – but requires concerted investor action. International coordination and cooperation will be essential ingredients of a successful recovery. Policymakers need to move decisively to put in place policies and funding to support an acceleration in investment where solutions are at hand, and to invest in getting more solutions to market and at scale. Implementation will be key, and investors have a major role to play, working with governments and other stakeholders to design policies that are transparent, effective and aligned with sustainability goals.
  
  
• Climate policy fundamentals are unchanged – but there is opportunity to accelerate policy commitments, and ensure they are inclusive. As the United Nations Framework Convention on Climate Change (UNFCCC) has stated, the COVID-19 pandemic has put many aspects of our economy and lives on hold, but it has not stopped the climate emergency and will not prevent the risks from extreme weather events and other climate-related shocks that threaten us now and in future. Policy makers need to seize the opportunities created by shifts in markets and behaviour to accelerate change, focusing on areas in which the COVID-19 recovery and decarbonisation priorities are best aligned. In order to create a decisive green transition, targeted government stimulus spending must be backed up by accelerated measures to build markets that can deliver for people and the planet.
  
  
• Investors and companies will likely be subject to a heightened degree of scrutiny. They should contribute in ways that are effective and fair. The pandemic has brought the multiple dimensions of poverty and vulnerability experienced by millions of people into sharp focus. For these people, decades of economic growth and development have not delivered prosperity and security. COVID-19 has exacerbated those vulnerabilities, created new ones and reduced people’s ability to cope with shocks.³ To maintain public support and deliver a sustainable, equitable, inclusive and resilient recovery, governments, investors and companies should contribute in ways that are (and are seen to be) both effective and fair.

With these themes in mind, redefining corporate purpose should be at the top of decision makers’ agendas. We need a step change in the role that the responsible investment industry can play in achieving sustainable development objectives through policy change. We see opportunities for investors to make a difference in tax reform, executive pay and accountability, human rights in the companies in which they invest (and their supply chains), as well as in ensuring that capital markets operate in the interests of all stakeholders. By focusing on these, based on the recommendations set out in the seven-part policy engagement framework, we hope the investment community can step up in the post-COVID-19 environment and help create a fairer and more sustainable financial system.

Policy engagement in recovery – a seven part framework

Action 1: Undertake policy engagement, aligning your engagement and investment objectives. Public policy critically impacts the sustainability and stability of financial markets, as well as social, environmental and economic systems. Engagement is therefore a natural and necessary extension of investors’ responsibilities. In recent years, there has been a dramatic increase in the attention paid by policymakers to sustainability issues– including sustainable finance.⁴ In some regions, and particularly the EU, policymakers have articulated a vision for sustainable finance that encompasses not just risks to the financial system, but the role the financial system has to play in financing the real economy.⁵ Investors – and investor associations – will be key enablers of this change, helping demystify the policymaking process, offering investment expertise and experience, and working collaboratively to marshal disparate voices behind shared goals.

Action 2: Work to policymakers’ timetables, not your own. The policymaking process tends to play out in fits and spurts. Periods of intense reform, often seen during a crisis, may be followed by years of calm and consolidation. Thus, the window for change closes fast, and perhaps now, in an age of social media, faster than ever. In response, investors must engage with policymakers on political timelines rather than their own.

The COVID-19 crisis has highlighted stark inequities in our economic system, leading some policymakers to focus on how financial markets can become more sustainable and inclusive. Now is the moment for investors to engage, offering ideas (including those that may have been written off in the past) that reflect the priorities of the moment, before the debate fades and the bandwagon moves on.

Similarly, raising issues at the beginning of a new administration or head of state’s term in office may help shape the agenda for the rest of that term, rather than waiting until later when other priorities may have taken precedence.

Action 3: Leverage arguments based on technical expertise. Investors habitually leverage sophisticated data analysis for their day-to-day work and should use this evidence-based approach to engage policymakers and highlight the benefits or otherwise of specific proposals. In the US, the Administrative Procedure Act requires that rules have a solid evidentiary basis.⁶ Moreover, there is often a statutory obligation to analyse costs and benefits. At time of writing, there are multiple 

European Commission-led consultations on a range of sustainability-related topics.⁷ Indeed, there is a manifest opportunity to act in multiple jurisdictions around the world.

Policymaker resources are often stretched thin, limiting their ability to conduct in-depth analysis. If investors can help regulators understand the potential impact of proposals, providing quantitative evidence and relevant technical expertise, they should do so.

Action 4: Engage at all levels of the policy process, as well as through the media. Legislative and regulatory processes are part of a larger political and policy ecosystem. This has implications for investors, which should engage at multiple branches of government. For example, if investors are concerned about a rule being written by a regulator, they should notify the regulator as well as policymakers responsible for oversight. In addition, when engaging with the legislature or regulators, it is important to try to shape the public debate. Investors should consider media engagement and collaboration with academic researchers as part of their advocacy. It will also be valuable to develop relationships with reporters, so that you can serve as a source of expertise and analysis for their stories.

Action 5: As much as possible, work together and speak with a coherent voice, especially where there is consensus. Policymakers are generally hard-pressed for resources and can struggle to collect the full range of opinions in the markets they regulate. With that in mind, investors can make a powerful and effective case where there is strong consensus. The fact of consensus will show policymakers that a policy change is likely to be welcomed. While achieving a consensus can be challenging, early collaboration between signatories, trade associations and trade bodies can facilitate positive engagement. For all investors, but particularly smaller investors, joining together can be an important way to amplify their voices and communicate a coherent message.

Action 6: Better understand the relevant dynamics of policy decision-making across committees and groups. It is important for investors to understand which legislative committees and regulators have jurisdiction – and therefore expertise – over the issues they care about. For example, policymaking in the US begins with congressional committees. The Senate Banking Committee and House Financial Services Committee have jurisdiction over the investment management industry and relevant financial regulators. ^{8 9} When an issue deserves more attention, these committees hold hearings, which can eventually form the basis for legislation. The fragmented nature of the regulatory system in the US means no single financial regulator is responsible for everything. Therefore, if an investor is concerned about issuer ESG disclosure, for example, it should work with the SEC.¹⁰ If it is focused on a bank’s financing of fossil fuel companies, it should raise its concerns with banking regulators such as the Federal Reserve.¹¹

Action 7: Be clear about who you represent and how policies impact your investor base. When engaging, it is important to state who you represent in terms of your investor base and be as specific as possible about how a law will impact your stakeholders. This could be as simple as concisely describing, at the beginning of any engagement with elected representatives or regulators, your organisation, your total assets under management, and your end investors.

Climate-related policy tools and priorities

Green governance Establishing standards, benchmarks and tools for measuring and managing climate-related commitments, risks and outcomes. Key policymakers: central banks, financial regulators, standards setters	Risk disclosure and management Paris Agreement commitments and NDCs, including net zero 2050 commitments and interim targets. TCFD – mandatory requirements and guidance for companies and investors to disclose their assessment, strategy and management of climate-related risks. ESG disclosures – mandatory requirements and guidance for corporate disclosure of ESG risk management and performance. Outcomes/Impact disclosure and management Sustainable Taxonomies (e.g. EU Taxonomy) to enable spending and investment decisions to be aligned with climate and sustainability outcomes. Social and human rights standards (e.g. UNGPs, OECD Guidelines, ILO Core Standards) to enable disclosures and decisions to integrate social outcomes and inclusion. Market standards – Including green bonds, social impact bonds and Paris-aligned benchmarks to facilitate investment flows into assets delivering sustainable outcomes.
Sector priorities and stimulus focus Policy action and stimulus spending targeted at priority sector transformations to reach net-zero emissions by 2050; focusing in the short term on areas with the highest job creation and economic multipliers. Key policymakers: governments, central banks	Clean energy infrastructure, including renewable energy generation, storage, flexible grids, and CCS. Zero emissions transport, including EV infrastructure and supply chains, and green hydrogen. Energy-efficient buildings, including renovations and retrofits for insulation, heating and energy storage. Land-based solutions, including afforestation and reforestation, and ecosystem/carbon sink restoration. Align policy and spending with climate goals and NDCs. Apply conditions on stimulus spending to avoid high-carbon lock-in (e.g., in fossil fuel sectors) and incentivise decarbonisation. Consistent with the commitment of the G20 dating back to 2009, governments should implement a phase out of fossil fuel production and consumption subsidies.
Coordination and cooperation	Promote and contribute to global coordination and cooperation on the pandemic response, which is vital to strengthen health systems and support economic recovery, particularly in emerging market and developing economies. Coordinate to avoid short-term responses that set back sustainability goals (e.g. new investments in fossil fuel power and infrastructure) and provide technical and financial support to enable green recovery policies and spending instead. Link recovery plans to NDCs under the Paris Agreement, and promote a coordinated response to accelerate action on climate change through key international forums (e.g., G7, G20, UN, NGFS) in preparation for COP26 in 2021.

Policy priorities for purpose, fairness and human rights

Redefining corporate purpose	Tax Tax transparency to end secrecy and opacity related to tax transactions. Strong investor commitments to responsible tax behaviour. Disaggregated corporate reporting to demonstrate that taxes paid are reflective of the commercial reality in which a company operates. Remuneration Remuneration committee consideration of CEO / worker pay ratios. Remuneration alignment with company strategy and business model to ensure long-term value. Integration of ESG metrics to guide performance-related pay. Diversity pay gap disclosures.
Fairness rooted in human rights, decent work and just transition	Understand changing nature of connections to human rights risks. Safeguard human rights of workers, suppliers, partners and associates. Implementation and disclosure according to UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises, and ILO core labour standards. Equal treatment of workers in terms of labour and social protection regardless of contractual status (temporary or part-time contracts, self-employed or gig workers), including rights to paid sick leave and health insurance. Disclosure by companies on living wages, freedom of association and collective bargaining, job security and benefits. New streams of private finance for communities affected by the low carbon transition.
Capital market functions and behaviour	Long-term strategic approach towards dividend policy. Restrictions on companies’ ability to redistribute profits to shareholders via buybacks when in receipt of emergency funding and sustainable recovery funding. Regulatory intervention to limit market stress and volatility and to support market stability and liquidity.