Prior to the launch of the United Nations Principles for Responsible Investment (UNPRI) in April 2006, ESG integration was a niche area advocated by a handful of asset owners and fund managers. But they argued that socially responsible investment meant little if confined to specialist SRI mandates or ethical funds. To have impact SRI needed to be aggregated into investment decisions. Adopting ESG integration as the cornerstone of the UNPRI has taken the concept a long way in a short time. Signatories to the principles now supervise $18 trillion in assets, making the UNPRI by far the world’s biggest investor initiative.

In October 2008, Donald Macdonald, chairman of the UNPRI, said investors running assets of $1.5 trillion had signed up in just one month! Now not being a signatory is more of a statement against responsible investment, than undersigning is for it. The principles aim to mainstream responsible investment by giving goals for integrating ESG issues into strategy and investment decisions. These range from drawing up responsible investment manifestos to including ESG criteria in investment mandate requests for proposal (RFPs). Put simply, if enough asset owners want their investments to be managed according to ESG criteria, then fund managers and advisors who want the business will follow. As a result, some of the world’s biggest fund management chiefs believe responsible ESG investment could be the norm within a decade.

The market incentive has been strengthened by the proactive approach of UNPRI signatories. Two UK pension funds, the £30 billion ($44 billion) Universities Superannuation Scheme (USS) and the Environment Agency, are behind a campaign to pressure some of the world’s biggest investment managers to sign the UNPRI or explain why they won’t. The £1.5 billion ($2.2 billion) Environment Agency pension fund has even terminated investment contracts with managers and cited non-adherence to the UNPRI as a deciding factor. Other European pension funds include UNPRI membership as an integral part of their selection process. For example, the French civil servants pensions scheme (ERAFP) now invests 100% of its €4.7 billion ($6.26 billion) assets according to SRI principles.

Importantly, the UNPRI are aspirational, not binding. An annual assessment program asks signatories to indicate progress towards the principles. After two years, discernible and verifiable change is expected. Nonetheless, some have accused the UNPRI of requiring little more than hollow intentions. David Diamond, Paris-based co-head of SRI development at Allianz Global Investors France, which runs €2.5 billion ($3.2 billion) in dedicated SRI assets, disagrees. He points out that the UNPRI earnestly commits signatories to integrate ESG across all asset classes, a complex task requiring sincere diligence: “We are seeing RFPs in the market that are extremely precise about the commitment of the manager to the UNPRI and ask for evidence of engagement, voting and research as outlined in the principles.”

Not just a talking shop, the UNPRI is following the lead of its corporate predecessor the Global Compact. Last year the Compact, a set of corporate standards on human rights, working conditions, the environment and anti-corruption, expelled 630 companies that did not report implementation progress. Likewise, the UNPRI plans to sanction PRI signatories that do not show progress, and hopes the threat of expulsion will be a driver of ESG progress in the coming years.

ESG integration should not be confused with either SRI or ethical investing – despite bearing elements of both. It is directly related to so-called “extra-financial” investment (EFIs) analysis, also known as “enhanced analytics,” an area of broker research that includes ESG factors. Hoping to “internationalize” the call for better investment research, the UNPRI recently announced a merger with the Enhanced Analytics Initiative (EAI), the association of investors and brokers that promotes inclusion of EFIs into company and sector research. The PRI/EAI tie-up suggests that organizations with similar goals in the ESG field could merge where they see overlaps. Such mergers could prompt UNPRI members to further actively integrate ESG factors into investment after making the initial sign-up commitment.

Looking forward 10 years, Diamond expects SRI funds will need to differentiate themselves in a world of broader ESG information. He also foresees a shift in what fiduciary duty means: “Following the publication of the Freshfields legal opinion in late 2005, it should no longer be considered a breach of fiduciary duty to look at ESG concerns. Indeed it may be the opposite: if things are material it will be deemed to be fiduciary to make sure they are considered.”

Just over 20 years ago a novel ethical initiative called Global Investment Performance Standards (GIPS) was floated. In spite the concept being supported by many, performance figures continued to be reported on a heterogeneous basis until clients demanded GIPS compliance. Today that compliance is widely accepted! In the coming years, particularly if concerns about the environmental continue to intensify, a fundamental level of ESG research may become ubiquitous to institutional investment. Fund managers will look to deepen research in ESG issues and develop specialized knowledge to differentiate themselves and unlock potential value in SRI and environmental investment areas.