Investors are getting serious on integrating environment, social and governance (ESG) issues, according to Mercer Investment Consulting's latest progress report on the UN Principles for Responsible Investment (PRI).

Some 82% of asset owners surveyed are reportedly conducting some shareholder engagement on ESG issues and 67% of them have adopted a formal policy on responsible
investment.

The assessment report was based on a questionnaire completed by the signatories entailing around 150 questions and covering all six principles. Scoring on the first two principles of the best practice voluntary guidelines - integration of ESG issues into investment processes and active ownership - is already at a good level, says Danyelle Guyatt, principal at Mercer.

Scoring on the fourth principle - promotion of the principles within the investment industry - has scope for improvement and Guyatt expects to see more asset owners moving to integrate ESG into investment manager agreements and fund manager searches and reviews.

At the end of May 2007 and 13 months after its launch, 41% of the PRI's signatories were based in Europe, 25% in North America, 15% in Oceania, 10% in Latin America, 6% in Asia, 2% in Africa and 1% in the Middle East, representing what is now in excess of a combined $10trn (€7.4trn) assets under management.

In looking for future trends, Guyatt says: "Emerging market investments are a good example of how ESG factors are a potential source of value added. Indeed, one of the big risks for asset owners investing in developing countries is the uncertainty in terms of poor transparency, governance standards, environmental and social issues. The integration of ESG factors into emerging market investments is therefore prudent from a risk/return perspective."

The UN is in the process of launching a project to promote the PRI among emerging market asset owners and managers in order to gain more signatories. But it also aims to raise awareness of ESG and its integration among mainstream asset owners investing in emerging markets, according to Donald MacDonald, chair of the PRI, and trustee director of the UK's BT pension schemes.

The other project scheduled for future development is the PRI clearing house, which was launched in November 2006. This is an online system for signatories, enabling them to share information about their engagement activities and collaborate on specific projects globally.

The 2007 review's overall response rate was 77%, though in the future, signatories will be required to participate in the assessment at least every other year, says Guyatt. The focus will rest on responses from North America, where 61% of signatories returned the anonymous questionnaires this year, compared with 100% in Latin America and 83% in Europe.

Large pension funds form the majority of signatories at this early stage because smaller schemes worry that it costs them too much to justify the return, says MacDonald.

He adds: "The PRI can actually provide a framework and a network for smaller organisations in order for them to be able to take part in collaborative engagement and be part of a bigger unit without spending a lot of time, money and focus on the issues."

Other reasons for pension funds not becoming signatories are that they do not regard it as a priority and focus on de-risking and matching their assets and liabilities instead and have a different interpretation of fiduciary responsibility, claims MacDonald. However he stresses, that there is a growing view that failure to take account of extra-financial risks may put pension fund trustees in breach of their fiduciary responsibilities.

But while the PRI may still have a long way to go in terms of effective implementation, Guyatt and MacDonald are convinced of the initiative's importance.

"The PRI has helped to provide a unified framework for mainstream asset owners and managers to work together to lengthen the investment horizon and widen the factors taken into account in investment decisions. And that collaboration has definitely helped to accelerate change, the sharing of ideas and to move from talk to action," says Guyatt.

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