Why do investors sign the Principles for Responsible Investment?

Some have only just made the decision to move towards more responsible investing, while others are already integrating environmental, social and governance (ESG) issues into every asset class. In this empirical paper, Majoch et al. examine the stakeholder relationship between the PRI and investor signatories, how it has changed over time, and how it varies between different types of investor. The findings highlight pragmatic legitimacy, organisational legitimacy, power attributes and management values as the factors having the most impact on why investors sign up to the PRI.

The picture that emerges is of a responsible investment community that sees the Principles for Responsible Investment as a path to improving their image, their standing with existing and future clients, and their investment strategy.

Analysis

Using internal proprietary data covering the first five years of the PRI between 2006 and 2011, and collected directly from United Nations supported Principles for Responsible Investment’s (PRI) signatories, the authors examine the attributes of the stakeholder relationship between investment organisations and the PRI.

The analysis is carried out in the framework of Mitchell’s et al. (1997) theory of stakeholder salience, which defines stakeholder salience as the priority given by company managers to stakeholder claims, and its development by Gifford (2010).

The findings highlight pragmatic legitimacy, organisational legitimacy, power attributes and management values as the factors having the most impact for investors. Using responses from the annual reporting and assessment of PRI signatories, to determine which factors held more sway at the point of signing, and whether that had changed during the key five-year period at the beginning of the PRI’s history: 2006-2011. The different types of power that factor most heavily include:

Normative power

• The perception that joining the PRI will have reputational or branding benefits, or be a way of signalling to clients that the organisation takes ESG issues seriously. Using normative power is linked to symbolic resources, such as media attention or reputation.

Utilitarian power

• Pursuing financial interest, for instance, by answering the rising demand of the market for responsible investment by fulfilling the expectations of existing or future clients.

Legitimacy is a perception that the actions of an entity are proper or appropriate within the values of society. In this study, the authors identify two different types of legitimacy which figure more heavily for investors:

Organisational legitimacy

• The PRI is perceived as a legitimate organisation and therefore signing grants legitimacy, by association, to the organisation and is seen as a licence to operate.

Pragmatic legitimacy

• The signatory perceives there is a business case for ESG integration and views the PRI as a useful framework for information, opportunities and support in integrating ESG into investment as a performance enhancing strategy.

Management values refer to the values of the managers in the companies and institutions involved in the survey being aligned with those represented by the PRI.

Normative and utilitarian power

The chart below shows the proportion of asset owners versus investment managers that indicated utilitarian and normative power as sources of salience in the decision to sign up to the PRI.

In recent years, an important motivation for signing has been normative power, which highlights how reputation and brand management is a key factor for investment firms. This has grown from the key signing motivation for 3% of sample firms in 2006 (of almost 100 respondents) to 47% in 2011 (with over 450 respondents).

Mainstream investment managers and corporate pension funds were more influenced by normative power than their Socially Responsible Investment (SRI) and public counterparts. In 2011, 40% of corporate pension fundsand 21% of mainstream investment managers cited reputation and cited reputational benefits in their response, compared with just 18% of public pension funds and 11% of SRI managers. The desire to win and retain business from new and existing clients (utilitarian power) saw a similar spike, rising from 1% in 2007 to 32% in 2011. This trend was more pronounced in asset managers than asset owners, as prospective clients are increasingly quizzing investment managers on their ESG credentials.

Organisational and pragmatic legitimacy

Another key motivator is the perceived high legitimacy of the PRI as an initiative and the view that the PRI bestows this legitimacy on those that sign up to it. A common thread from respondents was that they benefit from the credibility of the PRI within the investment community and with the companies they engage with. This view has been more common among investment managers than asset owners, and is more of a motivation among public pension funds than their corporate counterparts.

In the early stages of the PRI, many signatories joined because they believed their management values were already aligned with the principles. However, between 2009 and 2010, there was a sharp rise in organisations signing up out of pragmatic legitimacy in order to access the know-how, best practice, research and trends the PRI framework provides.

Responses from the signatories illustrate this. For instance, a French asset manager is quoted as saying:

The PRI provides an ambitious roadmap for continuous improvement with clear signposts and long-term objectives. Our organisation has managed, through its involvement in the past year, to move towards greater ESG integration more broadly (additional asset classes) and more deeply (from SRI to mainstream).

PRI R&A Framework responses, 2011

Meanwhile, a Brazilian investment manager describes the PRI as follows:

We have found a framework that accommodated our pre-signing beliefs related to ESG issues and value creation, and helped us organise or reshape our internal analysis processes around the principles.

PRI R&A Framework responses, 2011

While support for pragmatic legitimacy was strong and slightly growing over the sample period, management values were mentioned by an overwhelming number of signatories in the first years of the sample period but that number was reduced greatly in the subsequent years, barely reaching 10%.

The rise in pragmatic legitimacy was predominantly driven by investment managers. Historically, it was more of a motivational factor among dedicated SRI managers than mainstream investment managers – but this trend was reversed in 2010 as mainstream managers, not just their SRI counterparts, started to appreciate the pragmatic value of responsible investment, and the PRI.

As companies transition towards an ESG-integrated investment strategy, they see the PRI as a learning tool via webinars, discussions with other investors, implementation support, engagements and the PRI’s research outputs.

Conclusion

Whilst a limitation of the research is that data was self-reported, these findings offer an interesting insight into how both the investment industry and the PRI’s place in it have changed over the last decade.

The amount of responses that cite client approval and integration support as drivers for joining the PRI indicate that ESG is increasingly considered material, and is on the way to becoming mainstream. The research draws attention to how signing the Principles has been increasingly motivated by the business case for ESG integration and the opportunities ESG creates.

The authors suggest this can be seen in the replacement of the dominance of management values with the rise of factors such as utilitarian and normative power, organisational legitimacy and pragmatic legitimacy.

It gives reason to conclude that the PRI is succeeding in convincing the financial markets of the validity of ESG-integration as an investment approach, and it highlights that ESG investing is a continually developing space where investors are keen to join forces in acting, sharing knowledge and exploring ESG themes and strategies. The high degree of salience coming from a variety of sources confirms the PRI’s role as central in this emerging logic.

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  RI Quarterly vol. 6: Focus on the PRI impact

  February 2015