【PRI Reporting is Coming Soon】 Interpretation on Major Update of PRI Annual Report
BACKGROUND
The PRI (Principles for Responsible Investment) reporting cycle begins in early January and ends in late March. Signatories shall disclose publicly in accordance with the Annual Report from the beginning of the second reporting cycle.
On November 13, 2020, the PRI updated its reporting framework and methodologies for investors, which has been greatly changed compared with the last five years. The updated version will be adopted in the 2020 annual reporting (i.e. 2021 reporting cycle). The following article will sort through the latest PRI Annual Report, summarize and interpret key changing trends.
PRI AND PRI ANNUAL REPORT
The PRI is the world’s leading proponent of responsible investment committed to driving investors to make responsible investment by understanding and applying environmental, social, and corporate governance (ESG) factors. According to the PRI’s website, nearly 3,250 investment institutions around the world have become signatories as the influence of this international network is consistently growing. In Mainland China, 51organizations have become the PRI signatories, including 41 investment institutions.
In order to demonstrate the results of their responsible investment activities, signatories are required to prepare for the PRI Annual Report during the reporting cycle (from the beginning of January to the end of March) with information disclosure ranging from macro policies to specific asset levels. The assessment report of Annual Report will be released in July every year.
CHANGES OF THE PRI ANNUAL REPORT
Every year, the Reporting and Assessment Advisory Committee renews the PRI Annual Report between November and December. From 2014 to 2019, there has been no structural changes in the overall reporting framework and assessment methodology of the Annual Report until mid-November 2020 when major adjustments of the overall framework logic as well as methodologies have been made which required signatories’ attention. The updated version will be the basic framework for the next five years that further changes in the foreseeable is minimal.
To ensure that it meets the overarching goal of driving positive change in the investment market, the PRI’s development of the new Reporting Framework followed three guiding points:
(1) The new framework should be more challenging through questions and be relevant to the quickly evolving responsible investment industry.
(2) Simplifies the complex categorization of problems in the previous version to form a more straightforward, simpler and more consistent structure with questions.
(3) Outputs should be more flexible，which clearly indicate the extent to which responsible investment has been implemented
Besides, according to the PRI’s official website, the “minimum requirements” for signatories launched in 2018 will also be updated. However, this change is not included in the 2021 reporting cycle. Details of the new “minimum requirements” is expected to be released in April 2021.
NEW PRI ANNUAL REPORT OVERVIEW
NEW PRI ANNUAL REPORT- MODULES
There are three mandatory modules in the new framework: Senior Leadership Statement, Organization Overview, Investment and Stewardship Policy. Other modules shall be filled in by signatories as they see fit.
Figure 1：New PRI Annual Report Framework
(Sources：PRI, 2021)
NEW PRI ANNUAL REPORT- TYPES OF QUESTIONS
Classification based on 3 types of indicator status and 5 types of indicator purposes in the previous version is simplified to the “Core” and “Plus” models.
Figure 2: Types of Questions in New PRI Annual Report
(Sources: PRI, 2021)
Assessment methodology comparison between the previous version and the new version
Although module scores are different in terms of form, the indicator scores and newly-introduced weighting for each question have significantly improved the new assessment methodology.
Figure 3: Comparison of Assessment Methodologies between the Previous Version and New Version of the PRI Annual Report
(Sources: PRI, 2021)
TREND ANALYSIS's
In addition to the structural changes mentioned above, new PRI Annual Report guidance has also made huge adjustment in the contents and scope of assessment. It is not difficult to summarize the trends.
1. Focus more on overall investment process
First of all, the new reporting framework focuses more on how signatories incorporate responsible investment practices in their overall investment process, rather than assessment of single investment strategy or ESG product.
2. More questions about the scope and depth of implementation
Compared with the previous version, the new reporting framework covers more questions about responsible investment practices and scopes with more detailed evaluation, which shows the PRI’s increasing focus on the range of responsible investment practices.
3. Pay more attention to examples and results
The new reporting framework includes more questions exploring responsible investment practices and results, which means the PRI has strengthened its supervision over implementation details with higher expectations on the effectiveness of practices.
4. Scoring of climate change related questions
In 2018, as part of the PRI’s programme on championing climate action, the PRI introduced questions based on the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD) in the PRI Reporting Framework. Since the 2020 reporting cycle, signatories have been required to report on the climate change indicators on a mandatory basis, which remains non-assessed. The indicators related to the strategy and governance recommendations will also be part of private assessment, while some ‘plus’ questions based on the TCFD recommendations around risk management and metrics and targets will remain non-assessed. According to the PRI’s official website, the organization aims to conduct scoring for all indicators in 2022, which shows that the PRI attaches greater importance to signatories’ practices in relation to climate change.
FOOD FOR THOUGHT
The trend of stricter reporting framework means that signatories shall maintain their responsible investment practices evolved and improved. The PRI encourages signatories to demonstrate how they can implement policies and strategies effectively and deeply throughout the whole investment process in their annual reports, and constantly improve their proficiency in relevant practices instead of simple disclosure focusing on relevant policies and strategies in the previous version. Therefore, responsible investment will become the new normal of investment activities. This requires signatories to make systematic adjustments to their overall investment process, which will inevitably affect the investment tendency and return of investments., Without a doubt, it is bound to be challenging for signatories.
CONCLUSION
As the responsible investment market continues to develop, it is a general trend for investment institutions to incorporate responsible investment in their investment practices. For investment institutions that have become the PRI signatories, a better rating in their PRI annual report is an opportunity to showcase their responsible investment leadership which helps improve their public image with recognition by the public, regulators and clients. Our green finance team has in-depth understanding of the PRI annual reporting and responsible investment practices. We can assist investment institutions in preparing their PRI annual reports, as well as forming and upgrading ESG investment systems. Please contact us for more information.
References:
https://dwtyzx6upklss.cloudfront.net/Uploads/w/h/f/overview_and_guidance_reporting_framework_structure3_584160.pdf
https://www.unpri.org/reporting-and-assessment/investor-reporting-guidance/5373.article#policy
https://www.unpri.org/all-events-and-webinars/climate-reporting-in-the-2021-pri-reporting-cycle/6834.article
https://www.unpri.org/reporting-and-assessment/minimum-requirements-for-investor-membership/315.article
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