IAPF Spring 2018 Irish Pensions Magazine

IRISH PENSIONS MAGAZINE | SPRING 2018 | 49 EXPERT OPINION governed firms are better positioned to withstand emerging risks and capitalise on new opportunities. The approach is not just for investors who follow a mission- or values- driven investment philosophy, but for anyone seeking a broader view of the issues that affect long-term value creation. As stewards of their members’ assets, scheme sponsors and trustees have the responsibility to consider all the risks and opportunities that can affect long-term investment outcomes. Incorporating ESG into the scheme’s investment strategy can help balance risk and potential returns. Why ESG Matters ESG is material to financial outcomes because a company’s environmental actions can signal: • Operational efficiency and lower costs • Reduced environmental liability • Opportunities for low-carbon revenue sources Because a company’s social behaviours can signal: • Effective management of human capital • Reduced risks (e.g. physical, financial, reputational) related to product/service safety • Opportunities for an expanded customer base Because a company’s governance practices can signal: • Financial andoperational decisions that best serve shareholders • Reduced risk from reputational damage or weak financial controls • Well-managed operations and costs in the face of regulatory changes The Evolution of ESG Investing Although ESG strategies have roots in earlier generations of socially responsible investing, today’s ESG investors may be less motivated by values than they are by the ability to use ESG factors to mitigate risk, and to capture opportunities for innovation and growth. For example, environmentally efficient firms may consume fewer resources and produce less waste than competitors, helping them generate lower costs and higher returns on capital. Social factors have emerged as ¬important proxies for management quality, for

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