To Follow or Not to Follow: The Principles for Responsible Investing

By Molly Murray | October 21, 2021

As the Environmental Social Governance (ESG) investing has become the new hot topic on wall street. The idea that investors should be investing in projects that would be positive for the environment and for the community is a relatively new idea that has been highlighted particularly over the last couple of years. Last November, the activist investor Engine No. 1 wrote a letter to ExxonMobil, the oil conglomerate, demanding they invest more heavily in green technologies and introduce new board members as well to achieve this goal. With the environment being just one piece of ESG, the range of how this applies to investing is endless. Whether it is analyzing the leadership of a company and how many females hold leadership positions or determining whether companies are doing enough to help their communities, the scope and application of ESG are broad.

Investment managers have been stating their alignment with socially responsible investing through becoming a signatory to the United Nations Principles for Responsible Investing (UNPRI). With about 7,000 signatories to the UNPRI globally, it is the world’s largest voluntary responsible investment signatory. The six principles are listed below:

  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

So what constitutes an ESG issue anyway? Is it the carbon emissions that a company is releasing? Or is it a measure of how diverse a company is? How exactly can these Principles get incorporated into the decision-making process anyway? These are the kind of questions one might think about when trying to unpack Principle 1 alone. The UNPRI is the “world’s leading proponent of responsible investment,” but the question of investor accountability to the Principles still remains up in the air. With goals for carbon neutrality on the rise and the government’s push towards integrating more green infrastructure, a huge component of this is the degree to which the private sector follows through on their intentions of being socially responsible investors.Principle 4 indicates that through being a signatory of the UNPRI there is a responsibility of signatories to promote the principles in the broader industry which leaves a very open-ended picture of what this might look like for managers. Does stating ESG intent on their company website qualify one as a socially responsible investor? Or is this more along the lines of directly telling other investors in the investment manager universe they need to become a signatory and implement the Principles. The second scenario seems especially unlikely, but perhaps there are ESG advocates at each investment management firm championing an industry-wide acceptance of Socially Responsible Investing.

The ambiguity of the majority of the Principles is not the case for the sixth principle that requires signatories to submit yearly reports on their implementation goals. Though this seems like it would be satisfactory, the UNPRI has no way to fact-check the veracity of the reports. Therefore, there is no way to verify the reporting of investment signatories, and it remains up to the honesty of the managers as to whether their reporting is truthful.

While the UNPRI is a step in the right direction, the lack of accountability from signatories leaves it up to debate as to whether or not managers actually follow through on the Principles. When considering managers’ stances towards ESG, it will be important to continually evaluate whether investment managers are following through on their SRI commitments and practices or if they are simply stating an intention without following through.

Edited by Maggie Reddington