New PRI Framework Could Catch Signatories Off Guard
All Principles for Responsible Investing (PRI) signatories must report on their responsible investing activities by April 29, 2021. On November 12, 2020, PRI released the newest version of the reporting framework, which is a major overhaul of the prior reporting framework. While the number of questions has been reduced by approximately 50% overall, there are more mandatory (core) scored questions focused on how a firm integrates their environmental, social, and governance (ESG) program into their investment analysis and execution. It is no longer enough for a firm to say they have a policy around a particular subject, now they must prove how the policy is executed and incorporated into the investment process.
The new reporting framework is a result of one of the key commitments in PRI’s 10-year plan laid out in 2017 – accountability. By adding more accountability, PRI intends to add teeth to what it means to be a PRI signatory and supports a signatory’s commitment to the six principles of PRI. To land on a revised framework, PRI spent almost two years consulting with stakeholders, including many PRI signatories, in an effort to get it right, before releasing the final version on November 12, 2020.
The new framework is effective for the 2021 reporting period which is open now through April 29, 2021 and looks back to the firm’s activities that occurred during the 2020 calendar year. While it was not a secret that PRI was going through a revamp, many stakeholders were surprised that the new framework was released so late in the year and effective for the next reporting period, particularly in light of the global pandemic. This late notice, coupled with a few significant changes, will likely leave many firms in a challenging position to show alignment with the enhanced requirements.
Structural Changes to the Framework
- Senior Leadership Statement – New module that includes mandatory but unscored questions that provide an overview of the firm’s approach and achievements on responsible investing, signed by the CEO, CIO, or other member of senior leadership.
- Investment and Stewardship Policy (ISP) – Previously the strategy and governance module, the ISP has been expanded to include questions related to climate change.
Updated Scoring System
PRI has recalibrated the scoring methodology, moving away from a star-based system to a more granular, points-based system. Each core question is assessed a score out of 100 possible points. Additionally, the core questions within each module carry a weight. Due to the significant changes of the scoring system, there is no comparability to prior assessments.
Significant Content Changes
Previously what was included in the separate climate change module, is now integrated in both the ISP and asset-class specific modules. While some questions were previously mandatory to report but voluntary to disclose and not scored, there are several questions that are considered core under the new framework, meaning they are mandatory and scored. There are also a number of voluntary questions, several of which are aligned with the TCFD recommendations around risk management, metrics, and targets. It is expected that these questions will become mandatory in the next reporting period, providing firms with a “heads up” to what they can expect next year.
Confidence Building Measures
The ISP module includes several core questions around confidence building measures. Previously, these questions were part of the closing module and, as such, not included in grading or benchmarking. The confidence building questions center around what measures have been taken to verify the information presented in the PRI report. It’s worth noting that these questions receive the highest weight (2x) and, through the scoring methodology, a higher value is placed on external assurance.
Although there is a new (voluntary) sustainability outcomes module, questions related to outcomes are also included as core questions in the ISP module, and as a result are included in the scoring. The questions ask about the sustainability outcomes policy and to which framework the outcomes refer.
- Maintaining and/or improving scores under the updated reporting framework will now require signatories to expand their ESG programs in multiple areas, some of which include:
- Climate change
- Confidence building measures
- Sustainability outcomes
- The late 2020 release of the updated framework suggests that many signatories may not score as well as they have previously. The upside to this is that the new scoring system does not allow for comparability to prior year scores. If a firm went from an A+ in 2020 to an 85 in 2021, it’s impossible to make any direct correlation in these scores. Also, other signatories are in the same situation, meaning it is likely that peer median scores will be realigned as well.
- The first reporting period for signatories is completely voluntary. This means that any signatory that signed up in 2020, does not have to submit a 2021 report. 2020 signatories may want to carefully consider whether they want to submit a report this period or take advantage of this voluntary reporting period in consideration of the enhanced requirements.
How We Help
Since the current reporting period covers the activities undertaken in the 2020 calendar year, unfortunately, it is a little late to implement anything that could mitigate some of the new requirements.
Third Party Readiness Review
A third-party readiness review is one action that could be taken now, if done quickly, to maximize the points available for the new confidence building measures for the current reporting period. Many of the items required to maximize this score involve an internal or external audit. Since the report is due by April 29, 2021, it is not likely that an audit could be conducted before the deadline. A third-party readiness review can identify any gaps in the internal controls and processes so that the signatory can make appropriate changes and be ready for external assurance next year. ACA is ready and able to perform this readiness review before the reporting deadline of April 29, 2021.
Now is a great time to consider ACA’s comprehensive, customized ESG program management solution to tackle and get on top of the reporting enhancements for the next reporting period. It is possible that many voluntary questions for 2021 may become mandatory in 2022, so incorporating related program elements sooner than later will put signatories on a better footing for the next reporting period.
Meet ACA's ESG advisory specialists, Dan Mistler, Partner, Crista DesRochers, Partner, and Dani Williams, Principal Consultant, to discuss ESG trends and how to better address sustainability and responsible investing issues in the year ahead. Watch on demand.