Principles for Responsible Investment (PRI) requires compulsory disclosures of all signatories’ performances on responsible investment annually, except for a one-year grace period of voluntary disclosure for new members. After reports submitted, PRI will assess signatories on their responses in each module and send them a copy of confidential assessment score reports in July. In the meantime, PRI reviews its reporting framework in November or December each year, while no structural adjustment occurred in the past several years. However, after two rounds of consultation at the end of 2019 and the beginning of 2020, PRI made some developments to an updated version for investors, effective from the 2021 reporting cycle from February 1 to May 10 this year, while the framework for service providers remained unchanged. Therefore, during the latest reporting period, investor signatories should prepare and submit their reports following the newly revised framework.
Developments in new reporting framework
The development of PRI reporting framework for investors aimed at driving positive change in the investment market and followed three guiding points to align with the goal. The reporting framework should be:
- Evolved and more challenging to signatories. This implied that questions included should push forward investors’ performances on responsible investment more consistent with this fast-changing industry.
- Simpler, shorter, and more consistent. This required redesigning a more straightforward structure with fewer but more concise questions.
- Improved with more flexible outputs. This emphasized the ultimate use of the PRI assessment outcomes based on investors’ reports, which could support investors in managing external managers and navigating the extent of responsible investing performances.
Structure of Framework
The updated framework contains 11 reporting modules for investors, shifting from the previous 13 modules. Compared to the 2020 framework, it combined several asset-level modules and added one module named senior leadership statement. The new module can function as an introduction to the audience of a company’s performance on responsible investment and requires signatures from chief-level officers or similarly senior managers. Thus, this module could increase internal awareness and accountability for PRI reporting, as well as enhance the top-down management on PRI report and responsible investment.
As for other modules, to ensure the simplicity and consistency, PRI removed several indicators that were largely descriptive and prone to misinterpretation in each module. To develop a stricter disclosure, PRI adjusted the requirements in each module. For instance, the investment and stewardship policy module is similar to the previous strategy and governance module, but it requires signatories to provide more in-depth information on their ESG integration into whole investment process, as well as more climate-related information not covered in previous reports.
The Core and Plus Indicators Model
The new framework introduced the ‘Core’ and ‘Plus’ indicator model in place of the original one, which was divided into mandatory, voluntary, mandatory-to-report, and voluntary-to-disclose indicators. Correspondingly, PRI also divided questions under indicators into two types in the updated framework: process-focused and outcome-focused. Process-focused questions capture the actions taken to integrate ESG factors and interpretation of sustainability outcomes, while outcome-focused questions highlight the actual sustainability outcomes of investments. Therefore, the Core indicators refer to those close-ended questions that are relatively stable, process-focused, and mandatory; they will be assessed after submitting the report. The Plus indicators focus on both process and outcomes and are voluntary to report. Compared with the old classification, the renewed framework is simpler to signatories and ensures consistency in the entire framework.
Assessment of Final Reports
In the new framework, only Core indicators will be assessed. At the initial phase, PRI applies 100-point principle for each question. A higher score refers to a more advanced ESG practice or a larger number of questions answered. The second advancement in the assessment process involves assigning different weights to different questions. The calculation is based on the criteria of low weighted questions being multiplied by 1, moderate questions by 1.5, and high by 2. This process can highlight the importance of each indicator regarding responsible investment practice. Next, a percentage is calculated as total points achieved divided by total points of indicators relevant to the signatory in the module. In the final step, a five-star assessment reflects performance reported in each module in a more straight-forward manner. In general, the new assessment procedure is more flexible for investors to improve their performance based on the score and weight for each indicator.
Trends in future PRI reporting
PRI will design more outcome-focused questions in Core indicators. In the current framework, signatories disclose mainly on process-focused questions and are voluntary to report on sustainability outcomes of their investments. PRI stated that they would require more compulsory disclosures related to tracking and measuring sustainability outcomes by adding more outcome-focused questions to Core indicators.
PRI reporting framework will monitor signatories’ performances on their implementation details and extent of climate issues integration into investments. The development aforesaid already requires information disclosures of the effort in analysis and decision-making process regarding ESG integration. Meanwhile, PRI also requires mandatory disclosures on TCFD themes and will send signatories private assessment scores. In the future, PRI plans to put indicators on climate risk management metrics and targets into the Core category.
The questions on PRI reporting will bring the blueprint for responsible investment and PRI’s strategic plans to real life. The blueprint for responsible investment is PRI’s ten-year plan to take action to enhance the prosperity of the sustainable development market and the entire world. Moreover, under PRI’s ten-year plan, the PRI strategic plan 2021-2024 stated that it was still essential for all signatories to increase accountability to PRI’s six principles. Thus, both long-term and short-term plans urged to establish higher standards for PRI reporting to meet the ambitions in the plans and contribute to a sustainable world.
Implications for investors
The trend of tightening PRI reporting will push investors to keep focusing on sustainability issues and improving their practices all the time. PRI requires more than compliance with regulations or policies and asks signatories for details in the entire investing process, as well as awareness and monitoring procedures on climate-related risk management. For investors, they should adjust their portfolios or assets in a more sustainable direction and facilitate their management towards all the risks involved in investment practices.
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