Why investor participation in public policy is essential for sustainable markets

It requires long-term vision and the full participation of all market participants, most notably investors and investee companies, because it directly and indirectly impacts investors’ ability to deliver long-term, sustainable returns. Shaping what that policy looks like is therefore a natural and necessary extension of an investor’s fiduciary duty to protect the interests of its beneficiaries. Influencing the frameworks that shape the entire marketplace is an effective complement to engaging with individual companies.

Engagement

Policy engagement cuts across governmental bodies and international boundaries: as such the PRI is working hard to bring together signatories, policy makers and regulators. In September 2013 it established a policy work stream to address barriers to the development of a sustainable financial system.

In mid-2014, the PRI published a discussion paper on long-term mandates, building on existing research such as the International Corporate Governance Network’s (ICGN) model mandate.

In November 2014, the PRI launched its first public policy report, guiding investors and policy makers on investor engagement in the process and proposing a fivestep approach to better integrate investor perspectives on ESG factors.

It was based on a review of the experiences and lessons learned from five case studies of investors engaging in the policy-making process. Investors and policy makers were interviewed to understand the origins and motivations of their policy interventions, the engagement process, the influence of investors on the policy process, the lessons learned and, where available, the outcomes achieved.

Challenges

Ten years ago, international law firm Freshfields published its report on fiduciary duty and its implications for integrating ESG issues into institutional investment. It argued that “integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions”.

Nearly 1,400 signatories have committed to the PRI’s six principles, demonstrating investors’ broad recognition of this view of fiduciary duty. Many investors have made positive steps to incorporate ESG issues as part of their fiduciary duties, yet many PRI signatories are still not actively engaged with policy makers. That needs to change.

The 2014 PRI Reporting Framework revealed that, of 814 investor signatories, only 332 (40%) indicated that they, individually or in collaboration with others, had conducted dialogue with policy makers or standard setters in support of longterm investment in the previous year. This is despite 76% of respondents to a January 2014 PRI signatory survey saying that the PRI has a role to play in influencing public policy with regard to long-term investment, and 92% saying that the PRI should address the obstacles to sustainable financial markets that lie within market cultures, structures and regulations.

Investors’ uncertainty may be rooted in a lack of understanding about how to influence the policy process, concerns about the costs and timeframes involved in public policy engagement, or scepticism about whether public policy engagement can make a difference.

The PRI is working with the United Nations Environment Programme Finance Initiative (UNEP FI), the United Nations Conference on Trade and Development (UNCTAD) and the UN Global Compact to better understand why investors are not systematically integrating ESG as part of their fiduciary duty, and is compiling a report (to be launched September 2015) that will suggest practical actions for institutional investors and policy makers to overcome these barriers.

Transparency

Establishing greater transparency in the financial system is essential to promoting sustainable development. Transparency helps capital markets actors identify risks and opportunities and improve dialogue between parties. The PRI, through its partnership with UNEP FI, UNCTAD and the UN Global Compact, is working to improve transparency through the Sustainable Stock Exchanges (SSE) initiative. Since 2009, PRI signatories have been engaging stock exchanges and their regulators to explore ways to improve global disclosure on ESG issues.

While challenges remain, over the past decade a credible body of long-term investors has emerged, seeking policy change that sets the rules of the game in favour of sustainable value creation. These investors support policy measures that strengthen ESG integration, strengthen the stability and integrity of the finance sector, and deliver wider economic benefits. These goals align with the needs and interests of policy makers interested in long-term economic growth and sustainable development.

There is growing evidence that longterm investors can play a decisive role in delivering important policy changes, and policy makers need to hear from investors about how ESG issues affect the wider economy. If we are going to create a truly sustainable capital market, investor engagement in public policy is essential.