PRI’s Approach to System-level Risks—— Discussion of TIIP’s “System-Level Investing” ——June 2024

Takeshi Kimura

Board Director, PRI
Special Adviser to the Board, Nippon Life Insurance

Investments Financing Initiative
TIIP Seminar hostedResponsible
by Japan Impact-driven

1Investors Foresee Increased Action
At my organization, responsible investment is:
A. Managing ESG risks

Using ESG information to assess risk to holdings within the portfolio, and adjusting the exposures

B. Identifying real-world sustainability outcomes

Reviewing or mapping portfolios in terms of how aligned or not they are with different SDGs

C. Taking action on sustainability outcomes in the real world

Seeking to shape outcomes linked to a specific SDG by using capital allocation and stewardship

30A

12decrease

NowFuture

29

A+B

25

41

A+B+C

increase

630102030

40

Source: PRI IN A CHANGING WORLD SIGNATORY CONSULTATION, PRI BOARD RESPONSE, March 2023

506070 %2

The Six Principles (2006)
PREAMBLE TO THE PRINCIPLES
As institutional investors, we have a duty to act in the best long-term interestsof our beneficiaries. In this fiduciary role, we believe that environmental,social, and governance (ESG) issues can affect the performance ofinvestment portfolios (to varying degrees across companies, sectors, regions,asset classes and through time). We also recognise that applying thesePrinciples may better align investors with broader objectives of society.
Therefore, where consistent with our fiduciary responsibilities, we commit tothe following:

In 2017 the PRI formalized
the SDGs’ role in framing
these societal objectives,committing to “enable realworld impact aligned with theSDGs”, and to contribute to“a prosperous world for all”.

3The Blueprint for Responsible Investment (2017)
The Blueprint is the PRI’s mandate for the next decade – with an ambitious agenda for the next 10 years, weplan to tackle some of the most pressing ESG issues in the world today. Through nine priority areas, we willencourage signatories to become more active owners, to inspire leadership and support sustainable
investment strategies, resulting in prosperous and inclusive societies for future generations.
RESPONSIBLE
INVESTORS
We will strengthen, deepen and expand ourcore work: to lead responsible investors intheir pursuit of long-term value and toenhance alignment across the investmentchain.

• EMPOWER ASSET OWNERS• SUPPORT INVESTORSINCORPORATING ESG ISSUES• FOSTER A COMMUNITY OF
ACTIVE OWNERS• SHOWCASE LEADERSHIPAND INCREASE ACCOUNTABILITY• CONVENE AND EDUCATERESPONSIBLE INVESTORSSUSTAINABLE
MARKETS
We will address unsustainable aspectsof the markets that investors operatein, to achieve the economicallyefficient, sustainable global financialsystem that responsible investors andbeneficiaries need.

• CHALLENGE BARRIERS TO ASUSTAINABLE FINANCIAL
SYSTEM• DRIVE MEANINGFUL DATATHROUGHOUT MARKETSA PROSPEROUS
WORLD FOR ALL
We will enable signatories to improve
the real world – now and in the future– by encouraging investments that
contribute to prosperous and inclusive
societies for current and future
generations.

• CHAMPION CLIMATEACTION• ENABLE REAL WORLDIMPACT ALIGNED WITH
THE SDGs
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Active Ownership 2.0 (2019)
Active Ownership 2.0 is a vision for an evolved standard in stewardship that is underpinned by an increase
in investors’ ambition and assertiveness. It prioritises critical systemic goals and collective effort aimed atconcrete outcomes, rather than processes and activities or narrow interests.
The three central elements to an Active Ownership 2.0 approach are set out below.
OUTCOMES, NOT INPUTS OR PROCESSES

Active ownership 2.0 prioritises the pursuit and achievement of positive real-world goals.
COMMON GOALS

Systemic issues require a deliberate focus on and prioritisation of outcomes at the economy orsociety-wide scale. This means stewardship that is less focused on the risks and returns ofindividual holdings, and more on addressing systemic or ‘beta’ issues such as climate change. Itmeans prioritising the long-term, absolute returns for universal owners, including real-term financial
and welfare outcomes for beneficiaries more broadly
COLLABORATIVE ACTION

Focusing on collective goals and the delivery of positive real-world outcomes is possible only
through enhanced collaboration among investors and service providers. Challenges inherent inaddressing collective systemic issues, such as the free-rider problem, result in weaker pursuit ofcollective goals. Enhanced collaboration spreads the cost of addressing collective goals and istherefore central to achieving the required evolution in stewardship practice.

5

Investing with SDG Outcomes (2020)
STATE OF THE REAL WORLDPOSITIVE OUTCOMESOPPORTUNITIESRISKSNEGATIVE OUTCOMESINVESTORS◼ There is a continuous feedback cycle between (ESG) risks and opportunities and (SDG-aligned)
outcomes: ESG issues create risks and opportunities for investors, whose actions shape outcomes on theworld, which feed back into portfolios in the form of ESG risks and opportunities.
◼ A focus on shaping SDG outcomes involves broadening the analysis of individual investees’ financiallymaterial ESG issues, to also include a parallel analysis of the most important outcomes to society and theenvironment at a systemic level. These material issues and real-world outcomes overlap to some extent,
but not fully, and this is part of the gap that needs to close to achieve the SDGs by 2030.
6Legal Framework for Impact (2021)▪ Investing for Sustainability Impact (IFSI) : investment approach where investors
intentionally attempt to influence the behavior of investee companies and otherthird parties in assessable ways that can help achieve overarching sustainabilityoutcomes Broader concept than impact investing Easily applicable to an investor’s entire portfolio
 Can include sustainability laggards in the portfolio▪ To engage in IFSI, investors must pay attention to clarity about the outcomes concerned(‘goal certainty’)‒ overarching sustainability outcomes (e.g. Paris Agreement and SDGs)‒ portfolio-level sustainability impact goals‒ more specific sustainability impact goals (enterprise-by-enterprise targets)▪ To a significant extent the law requires or permits IFSI although, given the diversity ofjurisdictions and investor types covered, there are all sorts of variations.
7

Progression Pathways Framework: Investor Purpose-based Model (2025)

Progression

PATHWAY A

PATHWAY B

PATHWAY C

Incorporating ESG
factors

Addressing the driversof sustainability-related
financial risks

Pursuing positive
impactLevel 3

Level 3

Level 3

Level 2

Level 2

Level 2

Level 1

Level 1

Level 1More advanced levels may
involve incorporating systemlevel risks and identifying
positive and negative
sustainability outcomes.

Leve 3 may involve broader system engagement with otheractors.
Level 2 may involve incorporating system-level risks in company
stewardship activities.
Level 1 may involve articulating the inclusion of system-levelrisks in the investment policy.
8Addressing System-level Risks: PRI
Investing with SDG Outcomes
Legal Framework for Impact

Climate Action 100+

SDGs adopted by
all UN members

Advance (Human rights)
Spring (Nature)

2015

2016

2017

2018

A Blueprint for
Responsible Investment
Active Ownership 2.0

2019

2020

2021

2022

Sovereign Engagement(Australia, pilot)

2023

2024

2025

Progression
Pathways

Stewardship for Sustainability:
Evaluation tool and DDQ

9Field Building◼ System-level investors use both conventional and advanced investment techniques
as tools to mitigate system-level risks, one of the key tools being field building◼ Five tactics for field building that sustainable investors can use to increase theirimpact• Shifting other investors’ evaluation of issues• Sharing expertise with other investors• Delegitimizing business activities that are harmful for the environmentand society• Establishing voluntary standards• Supporting regulatory changes（Source）Emilio Marti, et. Al., “A more Impactful Strategy for Sustainable Investing”, Harvard Business Review, 2023.

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Challenges of Field Building◼ System-level stewardship with tradeoffs
Engaging on system-level sustainability-related risks may require investors to seek changes
that are costly for some companies individually but beneficial for the wider economy.

◼ Political exposure
Field building requires that investors publicly take a stance on sustainability issues, which
could lead to increased political exposure and backlash by people with different views.

◼ Free rider problem
Some avoid the costs of field building, while reaping the benefits. The result is a weakerpursuit of collective goals than would be the case if the distribution of costs and benefits
were more equitable. Thus, despite the importance of field building, investors may not fully
engage in it.

◼ Difficult to measure the impacts of system-level strategies
Any risk of “system-level washing”?
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