Investors engaging in sustainable post Covid-19 recovery and reform

Anna Triponel

August 17, 2020

The Principles for Responsible Investment (PRI) — a UN responsible investment initiative signed by over 2,000 public and private investors in 60 countries representing over US$80 trillion of assets under management—released a report with recommendations for investors on engaging with policymakers to ensure a sustainable and inclusive post-pandemic economic recovery. The report, Sustainable and Inclusive Covid-19 Recovery and Reform, determines that “investors significantly underestimate the positive role that the responsible investment industry can play in encouraging policy change” and aims to help investors bridge the gap between intentions and actions.

The report and recommendations were developed following a series of public and private engagements with investors and other stakeholders, including two different discussion forums each hosting over 220 investment professionals, an investor survey completed by more than 70 investors, and 15 interviews with decision makers at investment firms across the world and with representatives of civil society and the World Bank.

PRI identifies three themes that should influence investor engagement on post-pandemic policy:

  • “The case for a sustainable recovery is overwhelming – but requires concerted investor action”: Investors can play a significant role in influencing economic policy decisions and should work with governments and other stakeholders to leverage that influence towards recovery plans that take into account core concerns like human rights and climate change.
  • “Climate policy fundamentals are unchanged – but there is opportunity to accelerate policy commitments, and ensure they are inclusive”: The climate crisis persists throughout the COVID-19 pandemic. What’s more, the crises intersect in many ways and are even exacerbating one another. Recognizing both of these issues as public emergencies, “[p]olicy makers need to seize the opportunities created by shifts in markets and behaviour to accelerate change, focusing on areas in which the COVID-19 recovery and decarbonisation priorities are best aligned.” This needs to be achieved with the needs of both people and planet in mind.
  • “Investors and companies will likely be subject to a heightened degree of scrutiny. They should contribute in ways that are effective and fair”: The many economic and social inequalities exposed by and deepened by the pandemic will put greater pressure on investors and companies to act in the interest of not only their shareholders but also their stakeholders and broader society. According to the report, “[t]o maintain public support and deliver a sustainable, equitable, inclusive and resilient recovery, governments, investors and companies should contribute in ways that are (and are seen to be) both effective and fair.” PRI also notes that “fairness should be rooted in fundamental human rights,” with particular focus on respect for the human rights most at risk in the pandemic like the right to privacy, the right to non-discrimination and the right to health: “The investments required to support economic recovery will raise the risk of new human rights infringements (e.g., due to insufficient environmental, social and human rights due diligence, consultation, and planning or resourcing), particularly where governance is weak. […] Both investors and companies have a responsibility to safeguard rights and should press governments to do the same.”

The report’s recommendations center on seven different actions that investors should take. These actions, as well as key extracts from the report, are listed below:

“Action 1: Undertake policy engagement, aligning your engagement and investment objectives”

  • “Public policy critically impacts the sustainability and stability of financial markets, as well as social, environmental and economic systems. Engagement is therefore a natural and necessary extension of investors’ responsibilities.”

“Action 2: Work to policymakers’ timetables, not your own.”

  • “The policymaking process tends to play out in fits and spurts. Periods of intense reform, often seen during a crisis, may be followed by years of calm and consolidation. Thus, the window for change closes fast, and perhaps now, in an age of social media, faster than ever. In response, investors must engage with policymakers on political timelines rather than their own.”
  • As policymakers increasingly focus on how to make financial markets more sustainable and inclusive, “[n]ow is the moment for investors to engage, offering ideas (including those that may have been written off in the past) that reflect the priorities of the moment, before the debate fades and the bandwagon moves on.”

“Action 3: Leverage arguments based on technical expertise.”

  • “Investors habitually leverage sophisticated data analysis for their day-to-day work and should use this evidence-based approach to engage policymakers and highlight the benefits or otherwise of specific proposals. […] Policymaker resources are often stretched thin, limiting their ability to conduct in-depth analysis. If investors can help regulators understand the potential impact of proposals, providing quantitative evidence and relevant technical expertise, they should do so.”

“Action 4: Engage at all levels of the policy process, as well as through the media.”

  • “Legislative and regulatory processes are part of a larger political and policy ecosystem. This has implications for investors, which should engage at multiple branches of government. For example, if investors are concerned about a rule being written by a regulator, they should notify the regulator as well as policymakers responsible for oversight. In addition, when engaging with the legislature or regulators, it is important to try to shape the public debate. Investors should consider media engagement and collaboration with academic researchers as part of their advocacy.”

“Action 5: As far as possible, work together and speak with a coherent voice, especially where there is consensus.”

  • “Policymakers are generally hard-pressed for resources and can struggle to collect the full range of opinions in the markets they regulate. With that in mind, investors can make a powerful and effective case where there is strong consensus. […] For all investors, but particularly smaller investors, joining together can be an important way to amplify their voices and communicate a coherent message.”

“Action 6: Better understand the relevant dynamics of policy decision-making across committees and groups.”

  • “It is important for investors to understand which legislative committees and regulators have jurisdiction – and therefore expertise – over the issues they care about.” In practice, this means that investors should map the landscape of policymakers and tailor their engagement approach according to each entity’s jurisdiction and structure.

“Action 7: Be clear about who you represent and how policies impact your investor base.”

  • “When engaging, it is important to state who you represent in terms of your investor base and be as specific as possible about how a law will impact your stakeholders. This could be as simple as concisely describing, at the beginning of any engagement with elected representatives or regulators, your organisation, your total assets under management, and your end investors.”

“The reason we’ve done E more than S is because you can price it. Coronavirus is going to force us to do S. It’s forcing us to answer, ‘what’s an essential industry?’”                      

Jason Channell, Managing Director, Citi Global Insights, Sustainable and Inclusive Covid-19 Recovery and Reform

“Before the pandemic, we had focused most of our efforts on climate change – probably the largest ESG issue – but now we need to think about other issues in addition to climate change. In the immediate to middle term, we need to consider matters such as working standards, labour conditions, human rights, supply chains, and cybersecurity risk. While focusing on climate change was the right decision, we need to also pay closer attention to areas such as water resources, forestry, and pollution. COVID-19 is a critical situation, but at the same time, we believe we can turn this crisis into an opportunity for all investors to increase the scope of ESG issues that they engage on.”                      

Hiroshi Komori, Senior Director, Public Markets Investment Department, Stewardship & ESG, Japan Government Pension Investment Fund (GPIF), Sustainable and Inclusive Covid-19 Recovery and Reform

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