PRI in-person 2023: key takeaways

The PRI held their annual in-person conference in Tokyo this year. We’ve summarised the key takeaways, as well as other significant themes and topics.

Key takeaways

• The ESG agenda is expanding and maturing. People-focused issues like just transition, labour and human rights are rising to prominence. Nature and its interconnection with climate, food, and other critical systems is the latest challenge on the environmental agenda. Although challenges remain around standardised metrics, data coverage and accuracy especially for private markets, data implementation is advancing. Harmonisation of policy and standards (including ISSB) will further facilitate transparency and data reliability.

• Scrutiny of ESG practices and processes has proven helpful in highlighting greenwashing and enhancing the quality of disclosures. Investors can help to avoid the spread of an ESG backlash in their regions by engaging political parties to emphasise how ESG regulation helps them to serve their clients and generate value. Anti-trust and competition proceedings are unlikely to come to much and should not prevent firms from collaborating in climate alliances. Investors need now to focus more on providing clear language and evidence to support their sustainability claims, intentions, and processes.

• Stewardship and engagement are still powerful tools for advancing the ESG agenda. Although challenges for private markets persist, firms should take advantage of opportunities at the beginning of the ownership period and toward the end as the GP prepares to exit the company. Target setting provides another means for GPs to use their influence for the good of people and planet. PRI’s Advance framework is increasingly being used to monitor stewardship performance and progress on social issues such as human rights and inequality.

Main topics and themes

A just economic transition

Despite appearing as a global commitment in the Paris Agreement, the just transition is finally starting to come through in policies around the world. Policies like the US’s IRA give significant weight to issues that specifically impact on people – from extreme weather to modern slavery and quality jobs.

Other economies are bringing forth similar strategies, providing both certainty around the direction of travel for investors, as well as a credible means to deploy capital in support of people and the just transition. More collaboration and dialogue are now needed to ensure all groups and communities are brought along.

Climate and Nature

Nature and climate must be addressed as interconnected issues; we cannot ignore nature while focussing our efforts on climate mitigation, since a failure to halt and reverse biodiversity loss before 2030 (in line with the Kunming-Montreal Global Biodiversity Framework) will see us surpass irreversible tipping points which affect climate and nature.

Addressing both climate and nature will rely on technology, as it is noted that all IPCC scenarios incorporate carbon capture and storage to a greater or lesser degree. Sustainable food production is also likely to depend on technological developments since we are due to see a 10-15% decline in net primary productivity by 2050, while also seeing the global population grow by 2 billion.

Data in private markets

Data is critical for assessing and evaluating investment into operating assets or the assumptions underlying the creation of new assets. Not all renewable assets are born equal, and data offers clarity on the strength of an asset’s location, grid availability, resources and weather conditions. Multiple datasets are needed to increase the accuracy of forecasts, and the most reliable asset is one which is already operating, since it provides its own backlog of data.

Although private markets data requires consolidation and further improvement, it is now more robust and easier to identify the metric where GPs are performing well, and where more attention should be paid. The SFDR Principle Adverse Impact disclosures are cited as helpful in establishing one set of datapoints for GPs to collect which meet the requirements of multiple LPs. The adoption of such frameworks also sees a convergence around one reporting window, with fewer ad hoc requests.

Sovereign Bond and Policy Engagement

A 2020 report from the World Bank reported that government debt management officers are receiving increasingly more ESG-related queries and engagements from sovereign bond investors. 60% of respondents recorded and uptick in ESG-related enquiries, with 90% reporting that they had received at least one ESG-related enquiry.

Although it might be argued that sovereign engagement is limited by the fact that a sovereign’s voting rights lie with its citizens, there are other avenues for engagement, especially engagements centred around monetary and fiscal issues, such as roadshows, roundtable discussions, and investor trips.

Collaborative engagement as an investor tool

Is antitrust getting in the way of necessary collaboration in the ESG space? Against a backdrop of accusations of ESG cartels imposing anti-competitive agendas in the US, the differences between anti-competitive behaviour and helpful collaboration in ESG are explored.

Financial markets participants shouldn’t fear accusations of anti-competitive behaviour due to an ESG cartel since climate alliances are unlikely to fit the antitrust notion of industry boycotts (since there is no exclusion of competitors).

Furthermore, voluntary industry standards and benchmarking activities are accepted in antitrust law, and in order to be challenged, climate alliances would need to have demonstrable anti-competitive effects.

How can investors assess and manage physical climate risk and support adaptation and resilience?

Investors are increasingly considering the double materiality of their portfolios: the impact of their portfolio’s activities on the climate and nature, as well as the impact of a changing climate or natural disasters and other nature-related risks upon their portfolio.

Businesses and assets which don’t appear to be at risk, for example a factory on a hill, may be indirectly impacted by nature-related risks, for example if infrastructure such as bridges surrounding the factory become unusable.

Despite natural disasters occurring more frequently and often with a greater intensity, representatives from a range of organisation types concur that getting consensus to tackle systemic risk is taking too long.

Understanding the ESG backlash

The so-called ESG backlash has its roots on the one hand in the uncertainty that has surrounded ESG labels, ratings, and standards, whilst on the other in political motivations and vested interests. The reality on the ground is less dramatic than the column inches would suggest.

Investors – even in the US - continue to focus on mitigating materials risks and creating value; in short serving their clients. Around the world, the legislation emerging is overwhelming in support of ESG. Somewhat counterintuitively, increasing ESG scrutiny is improving and driving the agenda by weeding out greenwashing and enhancing the quality of data and disclosures.

While the possibility of a US-style backlash spreading elsewhere should not be ignored given the very real challenges posed by the transition, investors are advised both to focus on their own priorities and clients, but also to engage with regulators and political parties to ensure they are convinced of the industry’s support for ESG.

Expect to see more focus on evidencing sustainability claims and providing clarity on firms’ ESG language, intentions, and how their implementing ESG data and standards.

Leveraging stewardship opportunities in private markets

Private Equity General Partners find themselves in a different starting position from public markets investors, since a GP’s influence over management and role in board discussions is more involved. Best practices will vary depending on company maturity, the markets operated in, and many other factors, and engagement is likely to peak at the beginning of the ownership period and toward the end as the GP prepares to exit the company.

ESG due diligence during these transactions should include target-setting; the GP might issue action plans or focus on a handful of key areas against which progress can be measured and achieved. 

ESG and financial analysis in alternatives

Education and training help address an obstacle preventing commitment from becoming action, namely, a skills gap. Greater knowledge of the area can improve ESG due diligence and materiality frameworks for alternatives investors. In establishing which ESG areas are most material for GPs, they can reflect upon which areas most affect the longevity of their business and its ability to provide strong distributions.

Three key drivers for investment in alternatives are: technology development, which has seen electric vehicles, batteries, and energy storage go mainstream; significant decrease in costs as a global scale has been achieved and many green solutions are becoming cheaper than their non-sustainable counterparts; and the race to energy sovereignty as all major economies use renewables on the way to achieving energy independence.