Shareholders for Sustainability? Assessing investor motivations to adopt the Principles for Responsible Investment

Abstract

The Principles for Responsible Investment (PRI) is a voluntary investor-led initiative, backed by the United Nations. Together, the six principles are meant to provide a ‘best practice’ code of conduct for institutional investors seeking to adopt responsible investment practices with a secondary goal of contributing to improved corporate performance on environmental, social and governance (ESG) issues. Launched in 2006, the PRI has grown to be the single largest global investor initiative with over 700 signatory financial institutions representing assets under management in excess of $US20 trillion. Contributing to the broader literature on plausible explanations for why firms participate in voluntary initiatives, the thesis is primarily concerned with the question of what has motivated institutional investors to create and publicly commit to the PRI. A review of the broader trends behind the growth of responsible investment and the emergence of the PRI indicates the dominant utilitarian, cost-benefit logic is not wholly persuasive in understanding investor motivations. The research findings indicate that decisions to integrate ESG issues and publicly commit to adopting the PRI should be primarily viewed as a response to formal pressures by external stakeholders and actors in an investor’s institutional environment. Regulatory and stakeholder influences in the form of NGO advocacy campaigns have established normative standards directed towards the conduct of investors. As public opinion has shifted to put greater emphasis on sustainable development, the image and reputation of a pension scheme in relation to these trends have come under increasing scrutiny such that being perceived as a ‘responsible’ investor – sometimes even in the absence of a direct market rationale – has become a central driver behind the growth of responsible investment. The decision to adopt the PRI and establish beyond-compliance commitments to integrate ESG issues into investment decision-making should principally be seen as embedded in broader reputational risk management strategies. These findings support complex market rationalism explanations for firm participation in voluntary initiatives which suggest that firms commit to such principles or codes of conduct as a means of assuring stakeholders that their concerns are being internalized into corporate practices. A secondary focus of the thesis is to examine signatory implementation to-date, assessing the adequacy and effectiveness of the voluntary measure for the promotion of more socially-responsible and environmentally-sustainable investments. While substantial progress has been shown by a small group of PRI signatories, it remains unclear whether the PRI has generated significant improvement across the broader signatory base. The PRI suffers from several weaknesses commonly identified in the literature on voluntary initiatives. First, a lack of accountability measures limits incentives for investors to go beyond business-as-usual. Second, less stringent voluntary standards like the PRI are likely to suffer from adverse selection and free riding, therefore threatening the credibility of the initiative’s reputation over the longer-term. Ironically, weaknesses in the institutional design of the PRI may undermine the very reputational benefit sought after by signatories.