The 6 Principles by PRI

In one of its most recent guides "A practical guide to ESG integration for equity investing", Principle of Responsible Investment (PRI) outlined the following 6 principles for institutional investors who believe ESG issues can affect the performance of investment portfolios.

We will incorporate ESG issues into investment analysis and decision-making processes. 
We will be active owners and incorporate ESG issues into our ownership policies and practices. 
We will seek appropriate disclosure on ESG issues by the entities in which we invest. 
We will promote acceptance and implementation of the Principles within the investment industry. 
We will work together to enhance our effectiveness in implementing the Principles. 
We will each report on our activities and progress towards implementing the Principles.

Exactly, institutional investors are one of the most powerful stakeholders that place profound influence on their investments. By doing so, their concerns and emphasis usually affect the behavior and decisions of the economy. Think of the business world as a democratic universe and that institutional investors has the power to vote with their money. Enterprises have to perform in favour of their equity holders to secure and attract injection. Therefore, investors have the rights to advocate and raise ESG issues for target companies to integrate, investigate and manage ESG within their organization. This leads to shareholder advocacy/activism, the process of using shareholder influence to help bring about positive social and environmental change in corporations.

Shareholder advocacy is typically performed by institutional investors such as mutual funds, pension fund, trusts, and investment pools. However, individual investors can also be active shareholders. Using the strategy of share holder advocacy, investors can communicate directly with companies on ESG issues iwth a view to improving companies'' ESG performance.

When shareholders propose resolutions, they are engaging company management in an issue that concerns them. Holders of publicly traded stocks (or mutual funds) may introduce such resolutions, which may concern company policies and procedures, or ESG issues.

What is ESG?

ESG stands for Environment, Society and Governance, three aspects of how corporations do business and manage their risk. We've all heard of oil spills, pollution, labor abuse, child laboring, audit scandals, corruption and many other incidents that create negative impact and raise attention towards environmental, social and governance issues.

Quoted from NEI "Identifying and tracking environmental, social, and governance (ESG) risks as a part of the investment process helps contribute to better long term performance and potentially eliminates problems before they become costly mistakes." Many studies indicate that corporations that perform better ESG management, have lower risks and even outperform the market in return.  

Many mutual fund, PE fund and pension fund managers have taken the practice of impact investing/social responsible investing (SRI) and reported positive or even outperforming results. However, methods to quantify and evaluate ESG performances are still developing among different institutions and yet  to come to standardized principles or methodologies.


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Hi, this is Winnie from Taiwan. I'm interested in sustainable finance and trying to explore as much as I can. People (at least in my country) rarely know about this new field in finance that has developed drastically over the past decade, so I thought, well, why not spread the idea a bit. I don't have much time to dig deep, but this blog is a way to share what I've read from official/academic reports and websites.
Feel free to leave comments!
Let's learn together!
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More definition from different institutions:

Investopedia
CFA Institute 
Nordea
Investor Advocacy Clinic
European Association for Quality Assurance in Higher Education (ENQA)
Principle for Responsible Investment (PRI)


Media:
Green and Blue Tomorrow
Forbes-ESG-Themed Investments: What Are They And How Are They Managed?
Experimental Study Group 
InvestmentNews-Why it's time to believe the hype behind ESG investing