By Williams, Stephen
African Business , No. 341
In early 2005, the UN secretary-general, Kofi Annan, invited a group of the world's largest institutional investors to join a process to develop the Principles for Responsible Investment (PRI).
Individuals representing 20 institutional investors from 12 countries agreed to participate. Five years earlier, Annan had launched the UN's Global Compact (UNGC) as an international initiative to bring companies together to support 10 principles in the areas of human rights, working conditions, the environment and anti-corruption.
Through the power of collective action, the UNGC has sought to advance corporate social responsibility (CSR) so that business can be part of the solution to the challenges of globalisation. In this way, it was hoped that the private sector could usher in a more stable and inclusive global economy. Today, the UNGC comprises more than 3,100 businesses from at least 120 countries, making it the world's largest voluntary CSR initiative.
The obvious synergies between the PRI and the Global Compact initiatives led to the UNGC (and the United Nation's Environmental Programme's Finance Initiative) being asked to partner and mentor the PRI process. The result was the PRI declaration that is open to all institutional investors, investment managers and professional service partners to adopt.
In an increasingly complex and interconnected world, the importance of actively managing environmental risks presents a new set of challenges with far-reaching financial consequences for all corporations. This is true both at the level of companies and at the level of investment portfolios.
The financial industry, perhaps a little later than other corporate sectors, has increasingly come to acknowledge the importance of such issues and signalled its intent to improve their management in core business processes.
Several institutions took an early lead in implementing systems to manage environmental risks in their lending businesses. Other companies started to engage in initiatives aimed at improving accountability and governance or the integration of environmental and social aspects in project financing.
But until the PRI initiative, the international finance industry had not developed a common understanding on ways to improve the integration of Environmental, Social and Governance (ESG) aspects in asset management, securities, brokerage services and the associated buy-side and sell-side research functions.
This was due partly to the complexity and diversity of issues involved. Broadly speaking, ESG is the finance industry's chosen terminology to describe what other sectors call CSR.
As more analysts and fund managers have begun to experiment with the integration of these issues, knowledge and awareness in the industry is increasing. Investors have also become more vocal in their demand for products and services incorporating such aspects.
Changing nature of enterprise risk
Georg Kell, executive director of the UNGC says that, over the last seven years, "corporate social responsibility has evolved ... we have seen a market shift towards a more material approach on ESG issues. The trigger point to that has been a number of important developments in the financial community".
To some extent, financial markets are already factoring in ESG issues, and have been for many years, but often only if they were seen as being material to value creation and risk in the short term. "While socially responsible investment has long been around as a niche movement of the investment community," Kell argues, "it was largely driven by ethical and moral considerations.
"More recently, very serious mainstream players, from Goldman Sachs to JP Morgan Asset Management, to all the big pension funds in particular, have realised that in an age of globalisation, where businesses are interconnected to many more countries than they used to be, where the value chain creation is quite complex and involving exposure to all sorts of different environments, that the nature of the enterprise risk has changed. …