By

“It’s important to know that these principles are drawn from UN commitments and declarations, so they have global legitimacy. The companies in the compact are asked to internalize these principles, and then to report on how they are implementing them in direct operations, supply chains, etc.” – Gavin Power

 

Gavin Power

Gavin Power, deputy director of the United Nations’ Global Compact, has a picture on his office wall marking the launch of the Principles for Responsible Investing (PRI) initiative, and Canadian pension funds were leaders in its formation, he says.
The initiative was launched in April 2006 and the photo from the balcony of the New York Stock Exchange shows drafting signatories, including the Canadian Pension Plan Investment Board (CPPIB).
“Canadian pension funds were there in the beginning and continue to be leaders in sustainable, responsible development,” Power told ARIA during a recent conversation. “The fact that they were founding participants in the PRI is very important.”
The BC Investment Management Corporation (bcIMC) and the Caisse de dépôt et placement du Québec are among the founding signatories, and the majority of people on that balcony that day were from pension funds, demonstrating the sector’s commitment to sustainable, responsible investment and development, says Power.
“That sent a very strong signal … trillions of dollars in pension funds saying we care about this stuff.”
The PRI, an investor action in partnership with the UN Global Compact and the UNEP Finance Initiative, pursues long-term sustainable development through six voluntary and aspirational principles, comprising a guide to including environmental, social and governance (ESG) factors in investment decisions.
As well as incorporating the ESG factors, other actions include disclosure and reporting, being active owners and promoting the principles within the investment community. Starting with 100 signatories, the initiative now has more than 1,700 representing about $70 trillion (US).
The Global Compact itself was founded in 2000, following a speech the year before by Kofi Annan, the Secretary-General of the United Nations at the time, about “the importance of giving globalization a human face,” says Power.
“The idea of the Global Compact was to essentially underpin market and global economy in principles and values drawn from the UN conventions and declarations … and the primary focus would be on companies, corporates.”
The compact asks CEOs to commit their companies to sustainability principles and to support related UN goals. It has ten principles detailed in four categories: human rights, labour, environment, anti-corruption. Starting with 50 companies, it now includes more than 9,500 members, from 162 countries, which at the CEO level commit to the ten principles.
“It’s important to know that these principles are drawn from UN commitments and declarations, so they have global legitimacy. The companies in the compact are asked to internalize these principles, and then to report on how they are implementing them in direct operations, supply chains, etc.”
The Global Compact offers guidance in how to keep the commitment, but if they don’t “we expel them,” says Power.
“We have actually thrown out more than 6,000 companies for failing to report progress … that was a pretty bold move by the UN. We are basically the UN’s corporate responsibility, business ethics program. That’s how best to understand us. The UN Secretary-General chairs the Global Compact’s board, and we have a mandate from the UN General Assembly. We are really the business interface with the UN.”
The PRI, continues Power, evolved from a 2004 compact initiative, Who Cares Wins, which popularized the concept of ESG, he adds.
“The idea was to create a new concept and momentum that took this out of the socially responsible investing (SRI) area and into mainstream finance. Who Cares Wins was focused largely on the asset management community to begin to discuss the materiality of these (ESG) issues, which seemed to be soft issues, and linking them with core governance issues.”
Two years ago in September 2015 the UN continued its sustainability drive with the release of its 2030 Agenda, which has been called, says Power, a “blueprint for humanity.” The agenda has 17 Sustainable Development Goals (SDGs) aimed at erasing poverty, hunger, gender inequality, and other global ills. The agenda also seeks action on climate change.
“When we unpack ESGs, we are really talking about the goals that are reflected in the 17 SDGs. What’s really exciting, from my vantage point, is that they give meaning to the ESG concept.”
The new set of goals will prove valuable to investors looking to put measurable standards to their ESG efforts, says Power, as well as providing markers to sustainable development.
Looking ahead, the compact is targeting a sector Power calls “a sleeping giant,” corporate pension plans. Although the campaign to get companies to adopt sustainability practices has been successful, that’s not the case with the private pension plans they sponsor. Of the world’s largest companies engaged with the Global Compact, only 10 per cent of their plans are committed to PRI principles.
This led to a “call to action” by the PRI to persuade companies to have their pension schemes invest in ways that are consistent with the sustainability principles the sponsoring company is pursuing. Earlier this year, PRI and the Global Compact released the report Aligning Values: Why corporate pension plans should mirror their sponsors, prodding companies to ensure their schemes are behaving in ways consistent with sponsor sustainability measures and the PRI principles.
“From our vantage point, that offers some assurance that the plans aren’t investing in ways that might be undermining stated corporate goals.”
Mobilizing private financing, including that from the corporate pension “sleeping giant’ sector, will be key to achieving the SDG goals, says Power. It’s estimated that the annual capital needs to implement the goals will be between $3 trillion and $5 trillion, and while political will is necessary “unless we mobilize private finance, and the UN is finally realizing this I think, you are not going to attain the SDGs.
“We are going to need to activate private financing, and when you look at the size of the markets I have just described, whether it’s PRI or the corporate pension fund market … that’s where we start talking about going from billions to trillions.”
Because they are leaders in the ESG area, Canadian pension funds are naturals to expand into the SDG space, helping to develop healthy markets which in turn will provide long-term benefits that pay pensions and fulfill fiduciary mandates, he suggests.
“Healthy markets and healthy societies go hand in glove, so you can’t disconnected the two.”
Public pension funds are also driving the growing corporate commitment to sustainable development and investment principles, through their ownership of assets, says Power.
“I think the biggest reason that the majority of PRI signatories are now from the commercial asset management industry is because the public pension funds, the asset owners, are demanding it.
“We have major asset management firms, global institutions, in the Global Compact, and I dare say the main reason they are doing this, signing the PRI and adopting principles … is because they have pension fund clients who care about this stuff.”
It also seems to be good for the bottom line. The Global Compact issued its own 100 stock index three years ago, outperforming the market and its own benchmark, says Power.
As recently as 10-15 years ago, ESG factors might have been seen as hinderances to investing policies and practices, says Power, adding that whole argument has been turned on its head.
“We have flipped that entire argument by saying that because these issues are now proven to be material to corporate performances … they must be factored into investment processes and capital allocations because to not do so would actually be a breach of fiduciary duty. That is a radical inversion of the original argument.”

About the Author

Hi. I am an experienced writer, editor, blogger and communications strategist, providing online and print content solutions

 

Leave a Reply