Principles For Responsible Investment Research Articles

Employing behavioural portfolio theory for sustainable investment: Examining drawdown risks and ESG factors

ABSTRACT This study uses behavioural portfolio theory (BPT) within the Markowitz Portfolio Theory framework to enhance portfolio management by focusing on sustainability and risk mitigation during market downturns. It selects portfolios to hedge against market lows using Conditional Drawdown at Risk (CDaR) and Expected Regret of Drawdown (ERoD). These measures help choose securities that perform well during a market decline. This study applies drawdown-based risk metrics to assist institutional investors and fiduciaries in making informed investment and fund management decisions. By merging BPT with Markowitz’s mean–variance framework, selected investments are maintained above a safety threshold, contributing to the portfolio’s overall quality and sustainability. Additionally, by incorporating an Environmental, Social, and Governance (ESG) preference function, the findings suggest that BPT built portfolios meet traditional performance standards and align with socially responsible investment principles, thereby offering higher utility and alignment with investor values focused on sustainable investing.

Exploring Sustainable Finance: A Qualitative Inquiry into Responsible Investment and ESG Risk Evaluation

This research explores the landscape of sustainable finance, responsible investment, and ESG (Environmental, Social, and Governance) risk evaluation, aiming to understand their complexities and implications for financial markets and sustainability outcomes. Employing a qualitative research approach, the study conducts a comprehensive review and synthesis of existing literature, drawing insights from academic databases, journals, reports, and other relevant sources. The research design involves purposive sampling of literature based on relevance, rigor, credibility, and significance criteria. Data collection comprises systematic review and analysis of scholarly literature, while thematic analysis is employed for data interpretation. The findings underscore the growing recognition of ESG factors' importance in investment decision-making processes, driven by their materiality to financial performance and sustainability outcomes. Institutional investors play a pivotal role in mainstream adoption of responsible investment practices, driven by the acknowledgment of ESG factors' impact on investment risk and return profiles. However, methodological challenges related to ESG data quality, measurement, and comparability persist, hindering effective ESG integration and risk assessment. Regulatory initiatives like the United Nations Principles for Responsible Investment (PRI) and the Task Force on Climate-related Financial Disclosures (TCFD) have contributed to mainstreaming ESG considerations but face challenges of regulatory fragmentation and inconsistencies. Addressing these challenges requires collaborative efforts from stakeholders to develop standardized ESG reporting frameworks, enhance stakeholder engagement, and promote regulatory coherence. This study contributes to understanding sustainable finance dynamics and calls for interdisciplinary collaboration to bridge financial theory, sustainability science, and regulatory policy.

Climate change disclosure and evolving institutional investor salience: Roles of the Principles for Responsible Investment

AbstractThis study investigates the relationship between climate change disclosure and institutional investors. A particular focus of the present study is the question of if and how the relationship is affected by the Principles for Responsible Investment (PRI). A relevant context to the question is shareholder engagement, where institutional investors' legitimacy affects the outcomes. Thus, this study examines Japan, where shareholder engagement is the main pathway for institutional investors to convey their ESG‐related influence to investee companies. Using the stakeholder salience theory as a theoretical framework, the empirical results of analyzing 17,604 firm‐year eXtensible Business Reporting Language (XBRL) documents of listed Japanese companies provide evidence for the following. First, institutional stakeholders' holding ratio has positively influenced corporate climate change disclosure (power). Second, the positive influence of institutional investors is more significant when PRI‐signed institutional investors are present (legitimacy). Third, the aforementioned relations gained statistical significance gradually during the analysis period (urgency). Fundamentally, this study shows that the stakeholder salience theory contributes to a deeper understanding of the relationship.

Does institutional commitment affect ESG performance of firms? Evidence from the United Nations principles for responsible investment

Based on the sample of institutions in China that signed the United Nations Principles of Responsible Investment over the period from 2012 to 2021, we study whether institutional commitment improve their environmental, social, and governance performance. The results show that institutional commitment has better environmental, social, and governance performance on its investment targets. After a series of robustness tests such as instrumental variable method and propensity score matching method, the main regression results remain unchanged. In further analysis, we find that this relationship is more pronounced when institutions are controlled by the state and have more media coverage. This study provides a new dimension for the firms to enhance environmental, social, and governance performance and also provides a theoretical basis for United Nations Principles of Responsible Investment to further expand its scope of influence.

ESG 경영에서의 디자인 활용 방향성 제시

Since the 2004 UN Global Compact, ESG management has become crucial, notably emphasized in the 2006 UN Principles for Responsible Investment. This study explores design's active role in ESG, focusing on the social aspect, especially employee welfare, through a comparative analysis of Patagonia, Logitech, and Apple. While environmental concerns dominate ESG, this research zeros in on the social sector. Patagonia integrates design into its corporate philosophy, positively impacting employee health. Logitech and Apple strategically use design in product development but have limitations in addressing internal employee needs. To enhance design's role in ESG, it's crucial to guide both product development and shape corporate culture positively. Acknowledging limitations due to limited corporate information, this paper aims for more in-depth research in the future.

Towards a More Reliable ESG (Environmental, Social, and Governance) Assessment Framework: Lessons from the PRI Initiative

In recent years, green investments and ESG (Environmental, Social, and Governance) principles have gradually become the focus of the industry's attention. However, the future of ESG still has some uncertainties, and the diversity of ESG data and metrics has led to challenges in comparing ESG performance across companies, making it complex to determine the relevance and substantive ESG issues related to financial performance. This paper explores the evolution and challenges of ESG investments and proposes principles for ESG rating agencies to follow, originating from the PRI (Principles for Responsible Investment). This study recommends that rating agencies adopt a comprehensive assessment approach, considering a company's environmental, social, and governance performance and engaging with companies to obtain more comprehensive and reliable data. Additionally, rating agencies should maintain transparency, disclosing precise methods and data sources to enhance the credibility of ESG ratings. Most importantly, rating agencies must continuously improve their rating methodologies to reflect changes in the market and ESG practices, encouraging other rating agencies to adopt more consistent ESG assessment methods for a more sustainable investment practice and sustainable development in the financial industry.

Active ownership reporting among South African asset managers, and why it matters

Orientation: Asset owners should be able to distinguish between asset managers based on their commitment, accountability, and quality of their environmental, social and governance (ESG) screening, and engagement practices.Research purpose: Although there were 48 asset managers in South Africa who were Principles for Responsible Investment (PRI) signatories at the end of 2020, to the best knowledge of the authors this is the first academic study on the nature of active ownership reporting among South African PRI asset manager signatories.Motivation for the study: Asset managers are often accused of greenwashing and reporting practices that are mere ‘box ticking’.Research approach/design and method: The authors investigated the nature and extent of local PRI asset manager signatory active ownership reporting over the period 2016–2020, using content analysis and a self-constructed measurement instrument to ascertain the quality of reporting.Main findings: Vast differences were noted in the depth and breadth of shareholder engagement reporting, and as expected, the size of the asset manager played an important role in the quality of reporting.Practical/managerial implications: South African asset managers who claim to be responsible investors, by virtue of being PRI signatories, should ensure that public reporting accurately reflects their engagement activities and outcomes, given the potential reputational benefits and the increasing importance of ESG issues.Contribution/value add: The research may be valuable to asset managers and owners seeking a competitive advantage within the growing RI sector, by highlighting the importance of clear and transparent disclosure.

The Principles for Responsible Investment in Agriculture (CFS-RAI) and SDG 2 and SDG 12 in Agricultural Policies: Case Study of Ecuador

Global governance is a strategy to address the problems of food production and consumption, as well as to encourage responsible investments in agriculture. The FAO proposed 10 Principles for Responsible Investment in Agriculture (CFS-RAI) which, like the SDGs, are guidelines that guide the design of policies; however, although they are not necessarily considered, there are semantic coincidences. The objective was to analyze to what extent the CFS-RAI Principles and SDGs 2 and 12 are being contemplated in Ecuador’s agrarian policy. The semantic and content analysis of the policy was carried out, coding nodes and categories from keywords using the Nvivo program. The results show that the policy incorporates Principles 2, 8, and 7 and is aligned with SDG 2 in terms of increased productivity and income (target 2.3) linked to international markets (target 2.b, 2.c), the provision of infrastructure, research, agricultural extension, technology (target 2.a), agrobiodiversity, and traditional knowledge (target 2.5). It is related to targets 12.1, 12.2, and 12a of SDG 12. It is concluded that responsible investment in agriculture following the CFS-RAI Principles is a viable way to promote the achievement of the SDGs. The agrarian policy must be reformulated to incorporate the Principles and targets of the SDGs that are not considered but are important. The findings give insight to researchers and policymakers working on this area.

Ethics and Banking: Do Banks Divest Their Kind?

A growing group of institutional investors use divestment strategically to deter misconducts that are harmful for the climate and society. Based on Kantian ethics, we propose that divestment represents investors’ universal and absolute moral commitment to socially responsible investing (SRI). Following categorical and hypothetical imperatives and reciprocity as a norm, we hypothesize how institutional investors’ commit to SRI through a divestment strategy against ethically reprehensible behaviour of banks, especially when these investors represent banks themselves. Using a hand-collected database of the revelation dates of enforcement actions on banks, we find evidence that banks are less likely to divest equity holding on banks with misconduct (fined banks) than their non-bank institutional investors peers. Banks that commit to invest responsibly by signing for the Principles for Responsible Investment (PRI) are not significantly more likely to divest on fined banks stocks than non-signatory banks. Moreover, divestment of fined banks whose own legitimacy to operate is in question is not significantly different from non-fined banks divestment. We find that European banks are more inclined to sell their holdings permanently on fined banks than their United States peers. Therefore, bank’s moral commitment to SRI via divestments is influenced more by cultural and reciprocity norms than their moral commitment to participate in the PRI.

Tailor-to-Target: Configuring Collaborative Shareholder Engagements on Climate Change

We study collaborative shareholder engagements on climate change issues. These engagements involve coalitions of investors pursuing behind-the-scenes dialogue to encourage target firms to adopt environmental sustainability practices. Drawing on a unique data set of 553 engagements coordinated by the United Nations–supported Principles for Responsible Investment—and an innovative mixed-methods approach integrating fuzzy-set qualitative comparative analysis with regression analysis and qualitative interviews—we investigate how four coalition composition levers (coalition size, shareholding stake, experience, local access) combine to enable or hinder engagement success. We find that successful coalitions use four configurations of coalition composition levers that are tailored to target firms’ financial capacity and environmental predispositions, that is, target firms’ receptivity. Unsuccessful configurations instead emphasize single levers at the expense of others. Drawing on qualitative interviews, we identify three mechanisms (synchronizing, contextualizing, overfocusing) that plausibly underly the identified configurations and provide investor coalitions with knowledge about target firms and their local contexts, thus enhancing communication and understanding between investor coalitions and target firms. Our study contributes an emerging “tailor-to-target” theory of collaborative shareholder engagement that extends the literature by showing the importance of designing investor coalitions for effective climate-related engagement and the value of conceiving coalitions as different configurations of the same levers that can fit a target firm’s receptivity. From a practical perspective, our study prompts investors to move beyond one-size-fits-all approaches to instead tailor their engagement strategies to target firms’ receptivity. This paper was accepted by Glen Dowell, Special Section of Management Science on Business and Climate Change. Funding: This work was supported by Principles for Responsible Investment (PRI Research Grant). Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4806 .

Sustainable institutional investors and corporate biodiversity disclosure: Does sustainable board governance matter?

AbstractThe purpose of this study is to examine the impact of sustainable institutional investors (SIIs), based on their signatory status to the UN Principles for Responsible Investment (PRI), on corporate biodiversity disclosure (BD). Moreover, the moderating influence of sustainable board governance (critical mass of female directors, sustainability committees, and sustainability‐related executive compensation) as a possible channel of the link between SIIs and BD is analyzed. The study is based on a European sample consisting of 2319 firm‐year observations between 2014 and 2020 (EUROSTOXX 600) and embedded in a stakeholder agency theoretical framework. The results are in line with prior research on sustainable corporate governance and indicate that SIIs have a positive impact on BD and that the included sustainability board governance index strengthens this link. Our results are robust to a battery of sensitivity analyses. This study makes a major contribution to prior analyses, as it appears to be the first study on the link between SIIs and BD and the moderating impact of sustainable board governance. The study has major implications for business practice, regulators and research.

Sustainable institutional investors, corporate sustainability performance, and corporate tax avoidance: Empirical evidence for the European capital market

AbstractThis study addresses the influence of sustainable institutional investors (SII), based on the signatory status of the UN Principles for Responsible Investment (PRI), on corporate tax avoidance. Moreover, the moderating influence of corporate sustainability performance (CSP) is analyzed. The analyses concentrate on a European sample consisting of 1689 firm‐year observations between 2014 and 2020 (EUROSTOXX 600) embedded in a stakeholder agency theoretical framework. Correlation, regression, and robustness analyses are conducted. The results are in line with prior studies on equity ownership and tax avoidance and indicate that SII have a negative impact on tax avoidance and that CSP strengthens this negative effect. These results are robust to a battery of sensitivity analyses. SII represent a major monitoring mechanism in promoting responsible tax behavior, which is in line with other stakeholders' interests. Tax avoidance should be integrated into overall sustainability management to realize an increased firm reputation. As the European Commission initiated several regulations on sustainable finance, sustainability reporting, and tax disclosure, the empirical results stress the interdependencies between ownership structure, CSP, and tax avoidance. The study makes a major contribution to prior analyses, as this study is the first to assess the link between SII and tax avoidance and the moderating impact of CSP to urge top management to increase sustainability efforts.

Climate Change, Firm Performance, and Investor Surprises

We link records of firm performance, equity analyst forecast errors, and stock returns around companies’ earnings announcements to firm-specific measures of heat exposure for more than 17,000 firms in 93 countries from 1995 to 2019. We find that increased exposure to extremely high temperatures reduces firms’ revenues and operating income. A one-standard-deviation increase in the number of hot days decreases revenues (operating income) by 0.6% (1.8%) of the average quarterly revenue (operating income). Moreover, we provide evidence that increased heat exposure impacts negatively on firm financial performance relative to analyst predictions and on earnings announcement returns. These findings indicate that capital market participants do not fully anticipate the economic consequences of heat as a first order physical climate risk. This paper was accepted by Colin Mayer, Special Section of Management Science on Business and Climate Change. Funding: N. Pankratz gratefully acknowledges financial support from the French Social Investment Forum and the Principles for Responsible Investment [PhD Research Grant 2017]. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2023.4685 .

Indonesia Sustainability Reporting Standard: What Needs to be Improved?

Responsible economic growth is an integral part of the goal of sustainable development. This transition to sustainable development needs to be based on a change in the mindset of business actors that business activities will be better and more sustainable if they pay attention to social, environmental and governance aspects (ESG). Recent data shows that there is a predicted increase of ESG investment by the end of 2021 by 73%, with a global fund asset being expected to reach $18 trillion in 2021. In line with this understanding, Financial Services Authority (OJK) have previously released the Sustainable Finance Roadmap Phase I (2015 - 2019) which aims to increase the understanding and capacity of business actors to move towards a sustainable economy. One significant output of the Roadmap is the issuance of OJK Regulation No. 51/POJK.03/2017 on the Implementation of Sustainable Finance, which stipulates the obligation for Financial Service Institutions, Issuers, and Public Companies to submit sustainability report. To accelerate the transition to a sustainable economy, OJK has recently issued the Sustainable Finance Roadmap Phase II (2021-2025), which focuses on ESG-based business development. This paper seeks to examine the comparison between the sustainability reporting obligation under the OJK Roadmaps with global ESG instruments, including United Nations Principles for Responsible Investment (UNPRI), Global Reporting Initiative (GRI), and the European Union Directive on Non-Financial Reporting, and to analyse whether OJK Roadmap II has accommodated the interest of global investors in light of ESG Investment, particularly reliable ESG reporting obligation by companies listed in the Indonesia Stock Exchange. It will conclude with a comprehensive evaluation of aspects needed to be improved by the existing Roadmap II to increase ESG investment in Indonesia.

FACTORS DETERMINING SHARIA RESPONSIBLE INVESTMENT STRATEGIES

This study aims to find out and analyze the factors that determine the strategy of sharia responsible investment principles to become a reference for the public in investment activities as part of the effort to realize sharia maqashid, especially in maintaining assets. The research methodology being used is the Analytic Network Process (ANP) by involving various experts and or practitioners in the field of investment and sharia economics. Numbers of journals are also used as references to determine problem variables, solutions and strategies. The results of the analysis extracted from the responses of the experts were concluded that (1) the existence of regulations such as reward & punishment and regulatory supervision is a problem in the application of sharia responsible investment principles, as well as successively (2) public awareness and fund managers - in this case an understanding of the benefits of sharia-responsible investing (3) the resources of investment managers and (4) the Islamic investment climate itself. Solutions to the problem of implementing sharia responsible investment strategies successively (1) providing tax incentives for Islamic investment funds managed in accordance with the principles of responsible investment (2) integration of capital market issuers (3) literacy & socialization to the public and related parties to increase understanding of sharia responsible investment (4) increase commitment of issuers and the existence of ESG-proven investment instruments supported by special ESG rating agencies.

Growth, innovation, and policy for chicken in Latin America 1961–2019

SummaryMotivationLatin America has witnessed massive increases in production and consumption of chicken meat over the last 60 years and well beyond its share of the developing world's population. Chicken is now a major source of livestock protein in regional diets; leads livestock production in 25 out of the region's 33 countries; production, slaughtering, and sales provide millions of jobs.PurposeTo analyse growth rates for chicken meat in Latin America, why they have differed, how the role of innovation and development policies contributed to bringing about this growth, in turn leading to the patterns of governance of these activities today.Methods and approachThis study used a modified value chain framework along with FAO statistics, national data, published and unpublished studies to analyse macro‐level developments and their linkages to shifts in the organization of activities in the value chain for chicken from pre‐production through to consumption and trade from past to present.FindingsDifferent natural resource endowments, demographics, and dietary preferences combined with frequent innovations and an array of policy measures led to a spectacular surge in output and productivity, lower costs, and facilitated a steady rise in consumption. As part of that growth, these activities became increasingly concentrated in Brazil, Mexico, and Peru and within those countries in a few very large firms. Their operations expanded in the value chain beyond the farm gate, across the region, and in some cases around the world.Policy implicationsThis paper has implications for greater transparency in grower contracts, better working conditions for slaughterhouse workers and bird catchers, more environmentally and bird‐friendly chicken production, accelerated adoption of practices as per Principles for Responsible Investment in Agriculture and Food Systems in the value chain for broilers in Latin America and the Caribbean, and improved enforcement of laws and regulations governing the technical and financial operations of value chains for chicken, along with renewed collaboration among government authorities to that effect.

Do Responsible Investors Invest Responsibly?

Abstract We study whether institutional investors that sign the Principles for Responsible Investment (PRI), a commitment to responsible investing, exhibit better portfolio-level environmental, social, and governance (ESG) scores. Signatories outside of the USA have superior ESG scores than nonsignatories, but US signatories have at best similar ESG ratings, and worse scores if they have underperformed recently, are retail-client facing, and joined the PRI late. US signatories do not improve the ESG scores of portfolio companies after investing in them. Commercial motives, uncertainty about fiduciary duties, and lower ESG market maturity explain why US-domiciled PRI signatories do not follow through on their responsible investment commitments.

Prison break from financialization: the case of the PRI reporting and assessment framework

PurposeThis article seeks to unravel the mechanisms through which financial actors agreed upon a sustainability accounting standard without financializing social and environmental issues, i.e. assigning a monetary value to sustainability.Design/methodology/approachThe article examines the Reporting and Assessment Framework created by the United Nations Principles for Responsible Investment (UN-PRI), the leading reporting sustainability framework in the asset management industry. It relies on a longitudinal case study that draws upon interviews, participant observation, and archival data.FindingsThe article demonstrates that the conception of the framework was a funnelling process of sustainability valuation comprising two co-constituted mechanisms: a process of valorization – judging what is deemed of value – and a process of evaluation – agreeing on how to assess value. This valuation process was unfolded by creating the framework, thanks to two enabling conditions: the creation of non-prescriptive evaluative criteria that avoided financialization and the valuation support of an enabling organization.Originality/valueThe article helps understand how an industry can encompass the diversity of motives and practices associated with the adoption of sustainability by its economic actors while suggesting a common framework to report on and assess those practices. It uncovers alternatives to the financialization process of sustainability accounting standards. The article also offers insights into the advantages and inconveniences of such a framework. The article enriches the literature in the sociology of valuation, financialization, and sustainability accounting.

Gesundheit und Kapitalanlagen - wie sind die € 237 Mrd. der berufsständigen Versorgungswerke angelegt?

BackgroundExceeding ecological limits through climate crisis, loss of biodiversity, altered biogeochemical cycles and novel substances is dangerous and leads to increased morbidity. Hence, financial assets should be divested from hazardous industries and re-allocated to support the transformation to an economy that keeps activities within ecological limits. The present study investigates how sustainability criteria are applied to the assets of German pension funds. MethodsA survey containing 26 items on 1) business practice, 2) implementation of sustainability strategies, 3) application of ESG criteria to investment decisions, and 4) projects and goals was sent to each and every of 93 German professional pension funds. Furthermore, their annual business reports and publications were analyzed for information on sustainability efforts. Results37 of 93 pension funds responded to our survey, 8 of them returned the query. All agreed that ESG criteria are part of their business culture. Predominantly, they adhere to common standards for sustainable investments (UNPRI [United Nations Principles for Responsible Investment], 75% approval); yet, they do not exclude the production of goods that are potentially harmful to health (e.g., tobacco and alcohol). DiscussionA minority of the participating pension funds agrees that ESG criteria are part of their business culture. However, only few of them provide information about their actual application. Nevertheless, there are pension funds that do not respect sustainability criteria in an appropriate way, and thus take unnecessary financial risks and invest in harmful industries.

Integration of the Principles of Responsible Investment in Agriculture and Food Systems CFS-RAI from the Local Action Groups: Towards a Model of Sustainable Rural Development in Jauja, Peru

The Principles for Responsible Investment in Agriculture and Food Systems (CFS-RAI) are shown as suitable instruments to contribute to the Sustainable Development Goals (SDG) in rural areas. Local Action Groups (LAGs) have proven to be effective governance structures for the implementation and management of rural development projects based on participation and collective action. This research integrates the implementation of the LAG from the CFS-RAI Principles for the design of a rural development strategy. The foundations of these new structures are analyzed and the process of creating a LAG linked to the El Mantaro Regional Development Center (RDC) of the Universidad Nacional Mayor de San Marcos (UNMSM), in the Junín region (Peru), is described. The methodological process incorporates the “Working With People” (WWP) approach and the LEADER (Liaison Entre Actions de Développement de l’Économie Rurale) specificities for the analysis of empirical information obtained in surveys and workshops, with 350 people involved in the process. The results indicate that the LAGs, as multi-stakeholder partnerships linked to the RDC, are a novel way to integrate the CFS-RAI principles from participation, proximity management, strengthening local communities and promoting sustainable development through projects. These results contribute to the empowerment of civil organizations and motivate their participation in local political decisions related to sustainable rural development.