PRI’s latest focus: Progression Pathways and Equivalency
The PRI recognises that the sustainable investment and reporting landscape is complex and rapidly changing. To help investors keep up with the changes and meet the multiple reporting requirements they face, the group is now focusing on ways to clarify, streamline, and standardise how signatories report their progress on sustainable investment.
Progression Pathways
The Progression Pathways framework comes in response to an industry consultation “PRI in a Changing World” which revealed the need to reduce the regulatory burden surrounding sustainable finance and seek ways to more clearly communicate signatories’ actions and progress on responsible investment.
The framework is being developed in co-design with PRI signatories. Two initial concepts have been proposed:
1. Investor purpose
This concept seeks to help investors articulate whether their approach to responsible investment focuses on:
a. Incorporating environmental, social and governance risks and opportunities,
b. Addressing the drivers of financially material sustainability risks, or
c. Actively pursuing sustainability outcomes beyond financial materiality.
Concept 1 seeks to provide clarity and standardisation in relation to ESG definitions. Ideas like ESG integration can and have been interpreted broadly, with meanings ranging from ESG as risk management through to impact investing. This has led to confusion amongst wider stakeholders around what products and approaches are intended to achieve. Concerns about greenwashing and real-world impacts are widespread. Concept 1 seeks to help investors tackle these issues, by communicating clearly their sustainable investment intentions and thus creating appropriate and aligned expectations for their own clients and stakeholders.
The concept envisages three pathways:
Pathway A: Incorporating environmental, social and governance factors.
For investors focusing on maximising risk-adjusted returns and incorporating material environmental, social and governance factors into investment decisions and stewardship activities. May include incorporating sustainability risks, such as climate change, and identifying positive and negative sustainability outcomes. Investors may consider ESG factors but do not commit to taking action to improve sustainability outcomes related to their investments.
Pathway B: Addressing the drivers of sustainability-related financial risks
In addition to maximising risk-adjusted returns, as per Pathway A, investors seek to manage material sustainability risks by pursuing positive outcomes such encouraging emissions reductions. Investors take specific action on sustainability outcomes, set outcome goals and use tools such as stewardship and capital allocation to meet them. Progress towards goals is monitored.
Pathway C: Pursuing positive outcomes
Investors focus on positive sustainability outcomes, aka impact.
Investors are encouraged to pick the pathway most relevant to their purpose, though some strategies may cover more than one pathway, for example investment managers may also choose multiple pathways depending on investor purpose.
Pathways are designed to be mapped to other frameworks like TCFD and the UNGPs. Figure 1 provides a more detailed explanation of Concept 1.
Figure 1: detailed description of pathways (UN PRI)
Example
The PRI provides the following example to illustrate how Concept 1 might work:
“A multi-asset investment manager offers pooled funds and segregated mandates. When discussing its investment offering with clients, the manager uses the framing of the different pathways to ensure its offering is aligned with its clients’ preferences and long-term interests. Most of its clients are seeking competitive returns. The manager believes that Pathway B is most aligned with their long-term interests, and thus manages their AUM in line with this pathway. Some of its mandates are defined more narrowly however, and for these the manager seeks to align its activities with the highest tier of Pathway A. The manager also has large foundations and endowments among its institutional clients. These clients prioritise contributing to positive outcomes aligned with their mission, even where this may result in somewhat lower financial returns – and so their assets are managed in accordance with Pathway C ”
2. Investor progress on specific issues
This concept seeks to enable investors at different levels of sustainable investment practice to demonstrate their progress against a variety of specific sustainability issues including climate change, human rights, and biodiversity. Using this approach investors would describe not only their overall investment approach but also more detailed descriptions of their progress on specific issues using the levels and corresponding criteria set out under the concept – see Figure 2.
Figure 2: Concept 2 levels and criteria (UN PRI)
Example
The PRI provides the following example to illustrate how Concept 2 might work:
“A private equity firm wants to better integrate climate-related risks across its portfolio. The firm opts into the climate-related pathway and seeks to progress to level 1 for its holdings over the next two years. To demonstrate leadership in one of its impact-oriented funds, the firm seeks to meet the criteria set out in level 3 for that fund.”
Next Steps
The PRI is holding workshops and distributing a survey to signatories to gather information before developing the first iterations of the Progression Pathways for implementation around mid-2024. The Pathways initiative will be voluntary to join with signatories encouraged to choose the model and level of progression that best suit their approach and goals. PRI will provide guidance.
The framework is not intended as another labelling regime but instead designed to help investors understand how their commitments to other regimes like SFDR, TCFD and the Stewardship Code compare and how progress against them can be aligned and reporting minimised or combined. To facilitate this understanding, the PRI is also considering equivalency – see below.
The ultimate goal is for the Progression Pathways to be used as a tool to help signatories understand where there are commonalities across reporting mechanisms and thus report their progress against them in the most efficient way.
For further information on Progression Pathways: download (unpri.org)
Equivalency: Proof of Concept
The PRI’s equivalency programme will map the main existing regulatory and voluntary standards with the ultimate goal of developing a way to minimise the reporting burden for those due to report to multiple frameworks, using the Progression Pathways framework.
In March 2023, the PRI invited signatories to join its Reporting Equivalency Proof of Concept Working Group for Stewardship (REPOC-WG-S). The group is made up of PRI Asset Owner signatories and aims to provide proof of concept for assessing equivalency by establishing key and common requirements of reporting and assessment between the PRI reporting framework and the UK Stewardship Code. The group plans to move on to considering climate-related disclosures after the Stewardship Code. The working group began in mid-June 2023 and will run until Q4 2024.
For further information on equivalency: download (unpri.org)