Moral factors have been completely superseded by factors such as reputation and client pressure, when investment companies sign up to the United Nations’ Principles for Responsible Investment, notes International Capital Market Association Centre’s recent research report.

Arleta Majoch and Andreas Hoepner of the International Capital Market Association Centre, and Tessa Hebb from Carleton University in a paper titled “Sources of Stakeholder Salience in the Responsible Investment Movement: Why do investors sign the Principles for Responsible Investment?” note thanks to its size, prominence, and first-mover status, the PRI is the most important global responsible investment initiative in existence today.

ESG principles: Responsible investment gains momentum

Using five years of internal proprietary data collected directly from United Nations supported PRI signatories, the authors examined the attributes of the stakeholder relationship between the PRI and investment organizations. They point out that in the past decade, responsible investment has been gaining momentum in the face of the instability that has affected financial markets in 2008-2009.

The authors note from just over 100 signatories at the end of 2006, today more than 1,000 investment organizations have signed the principles and committed to including environmental, social and governance (ESG) factors in their investment process.

The researchers estimate the signatories represent over $45 trillion worth of assets, representing over a third of global assets under management.

ESG Principles Collective AUM of PRI signatories

ESG principles: Moral motives have become less important

The authors point out that PRI’s voluntary and aspirational nature implies there is a large heterogeneity of ESG advancement among its one-thousand signatories. Thus, being a signatory to the principles isn’t necessarily synonymous with being a responsible investor.

The authors note Mitchell et al. defined stakeholder salience as the priority given by company managers to stakeholder claims. They point out that Mitchell et al.’s stakeholder salience theory is a tool both for the identification and prioritization of stakeholders. The theoretical framework is applied to identify to what degree it possesses the salience-producing stakeholder attributes, viz.: power, legitimacy and urgency. The following graphic highlights the Mitchell et al. and Gifford framework combined:

ESG Principles Mitchell and Gifford framework

The authors point out that management values are a unique attribute in that they have been of major importance as a source of salience in the first two years in the sample, when the first wave of ethically and ESG-oriented investors signed up to the PRI. However, the authors highlight that they have been completely superseded by other factors in the later years when the values-motivated signatory recruitment pool was largely exhausted and mainstream investors were drawn to the PRI in large numbers by its growing legitimacy and material benefits.

The authors note moral duty has been overtaken by self-interest (differentiation, financial performance) and social pressure (client demand, reputation, license to operate).

The authors thus draw attention to how important branding and image are at an organizational level in the financial industry, and how a growing number that sign the PRI motivated by such benefits rather than moral duty.