IAPF Spring 2018 Irish Pensions Magazine

50 | IRISH PENSIONS MAGAZINE | SPRING 2018 EXPERT OPINION example with studies showing that management teams ¬with greater gender diversity provide superior corporate performance 2 . The value of good governance is clear as well, especially in light of recent corporate scandals related to auto emissions, food safety and labour issues. Effective, independent boards of directors and strong internal controls can reduce the likelihood of corporate malfeasance, fraud and other ethical breaches that damage shareholder value. These trends suggest that ESG factors will only become more important to corporate health — and by extension, to shareholder returns — over time. That makes ESG investing especially relevant for long-term investors such as DC scheme members. How ESG Can Fit into a DC Scheme It has been common for DC schemes to offer an ethical fund for scheme members who wish to choose an investment fund consistent with their personal values. Typically, this would be a fund that screens out certain companies with business activities counter to those principles, for example involvement in the arms 2 Women on Boards: Global Trends in Gender Diversity on Corporate Boards, MSCI, November 2015. trade or tobacco. But the debate is moving on to the default strategy, given that relatively few scheme members make active investment choices and reflecting the fact that the ESG debate now focuses more on long-term financial risks than on simply values themselves. Equities form the majority of the growth phase of most default strategies, and most DC plans will have significant exposure to index funds benchmarked to market- capitalisation weighted equities. We expect tosee theseapproachesevolve to reflect ESG principles; excluding some companies — for example those producing controversial weapons — and tilting towards those that have better ESG credentials. Some early approaches have focused on climate change and tilting towards less carbon-intensive companies, but this can be extended to cover wider environmental issues (such as water and waste) and social issues (such as labour relations and diversity). This approach can still be executed by a systematic index-based strategy, using ESG ratings and analysis from established research providers. Some schemes may also look to include a Smart Beta factor-based investment approach alongside these ESG tilts. Schemes have an obligation to offer members appropriate and