As the CEO of the PRI, how have you seen responsible investment grow and evolve over the last 10 years?
[FR >] The Principles for Responsible Investment (PRI) was formed in 2006 by a small but committed group of 86 asset owners and today we have well over 4,300 signatories who collectively represent over $121 trillion USD in assets under management. I have had the pleasure of leading the PRI for nine years, and during this time I have seen the exponential growth of responsible investment. Over the last decade, responsible investment has shifted from a niche consideration and moved firmly into the mainstream. We have seen a widespread uptake of ESG principles and a maturing of responsible investment philosophies and practices.
Recently, Bloomberg estimated that global ESG assets are on track to exceed US $53 trillion by 2025, representing more than a third of the US $140 trillion in projected total global assets under management. There are no signs of responsible investment’s growth slowing, with the COVID-19 pandemic accelerating investors’ integration of ESG factors into their investment practices. PRI’s priority has always been to promote responsible investment – to bring it to the mainstream, encourage its wider adoption, to promote best practice and in turn the development of infrastructure and frameworks to unify this best practice. So, I am pleased to see more and more firms integrating ESG considerations into their investment activity and architecture.
In the wake of COP26, what are investors’ priorities for addressing climate change?
[FR >] When I started working in the responsible investment space the terms “nature,” “biodiversity,” and “net-zero” were hardly used in the investment context, and issues around climate and the environment more broadly were only being integrated by a small number of investment institutions. However, investors now understand that dealing with the risks of climate change is integral and we have seen our signatories working proactively to address climate risks. In the wake of COP26, investors are not waiting for governments to act and they stand ready to deploy capital to support climate commitments and the transition to net-zero. To achieve net zero, we need to see near-term commitments, with businesses and non-state actors halving their emissions by 2030.
Many of our signatories are taking action through initiatives like Climate Action 100+ (CA 100+) and The Net Zero Asset Owners Alliance (AOA). These are just two of the financial sector groups bringing investors together to work for the good of their clients, society and the planet.
The UN-Convened Net Zero Asset Owners Alliance is comprised of 42 major asset owners, with US$ 7 trillion in AUM, committed to net zero by 2050, as well as setting short term targets. By joining the alliance, members commit to transitioning investment portfolios to net-zero greenhouse gas emissions by 2050.
While Climate Action 100+ is the largest ever investor to corporate engagement with over 600 investors representing US $55 trillion in AUM. Engagements conducted by CA100+ signatories have secured a number of ground-breaking emissions commitments from companies in hard to abate industries including BP, Shell, PetroChina, Bayer and Qantas Airways just to name a few.
We must tackle the climate crisis from multiple angles, and deforestation and biodiversity continue to be pressing issues that must be addressed if we have any hope of keeping the world to 1.5 degrees of warming. At COP26, we saw over 100 nations backed by more than 30 financial institutions commit to mobilising US $19 billion in support of a historic pact to halt and reverse forest loss and land degradation by 2030. As part of the Glasgow Leaders’ Declaration on Forests and Land Use, investors announced they will no longer invest in activities linked to deforestation sending an important signal to corporates that investors are willing to take decisive action to address climate change.
In the wake of COP26, investors are not waiting for governments to act and they stand ready to deploy capital to support climate commitments and the transition to net-zero. To achieve net zero, we need to see near-term commitments, with businesses and non-state actors halving their emissions by 2030.
How has the COVID-19 pandemic changed investors’ perspective on the importance of social issues?
Over the last decade, investors’ understanding of both environmental and governance indicators and their materiality has improved, and investors have moved to integrate those indicators into risk analysis and screening. However, social performance considerations have often been dismissed as either immaterial or a lesser priority, because of the perception that they present a lower risk to revenue streams or are less likely to be subject to regulatory action or punitive measures.
However, COVID-19 has shown people the interconnectedness of issues and clearly demonstrated the materiality of social, or human rights issues. It has provided a very real example to governments, businesses and investors alike of the fact that without healthy people in addition to a healthy planet, there can be no healthy economy. As a result, we have never seen our investors so engaged on human rights and thankfully, social issues are no longer considered the poor cousin in the ESG family.
Put simply, it’s never acceptable to exploit others to make money and investors need to make that point clear to their portfolio companies. In addition to growing expectations around responsible business conduct, there is increasing regulation and legislation around human rights and labour rights relevant to both companies and investors. As investors, corporates and governments grapple with climate change, human rights issues also continue to be on top of the agenda when it comes to the just transition. The transition to a resilient, low-carbon economy must be fair for workers and communities. Investors can act as stewards of assets, allocators of capital and as influential voices promoting inclusive growth and sustainable development.
How have we seen responsible investment grow in Latin America?
At the PRI, we are committed to fostering the growth of responsible investment and ESG integration in Latin America. I am pleased to have seen the accelerated growth of signatories in the region, and as of November this year, we now have over 200 Latin American signatories. This includes 96 in the wider Latin America region and a further 106 in Brazil. The interest in responsible investment in Latin America began in Brazil and has expanded into Mexico, Colombia, Chile and Peru where we’ve seen promising growth in ESG integration. We have also seen increasing regulatory changes in Chile, where the Superintendency of Pensions calls for the inclusion of ESG factors and climate risk in the investment decisions of the contractual early retirement pension in the public sector (AFP). In Mexico, the Comisión Nacional del Sistema de Ahorro para el Retiro (Consar) will require pension funds to incorporate ESG into investment decisions from 2022. Finally, in Colombia, the Financial Superintendence launched circular 007 that modifies the investment regime for AFPs, insurers and capitalisation companies incorporating ESG and climate risk criteria.
Just as it did in the rest of the world, COVID-19 also accelerated interest in responsible investment in Latin America as investors create recovery plans that protect human and natural resources allowing for resilient and efficient growth.
Just as it did in the rest of the world, COVID-19 also accelerated interest in responsible investment in Latin America as investors create recovery plans that protect human and natural resources allowing for resilient and efficient growth. They also wish to promote the development of solutions that will mitigate the effects of the current crisis as well as preventing future ones. As we build back better from the pandemic and work to address climate change, this is a key moment for Latin America, and we encourage investors to embrace ESG factors in their investment practices. In fact, it is a unique opportunity that provides a turning point to guiding capital flows towards sustainable development. The decisions and actions that are taken now can define the nature of the lives that Latin Americans will lead and retire into in the years and decades to come.