IAPF Spring 2018 Irish Pensions Magazine

8 | IRISH PENSIONS MAGAZINE | SPRING 2018 EXPERT OPINION approaches increasingly untenable and robust, thoughtful analysis more critical. 1. The growing impact of social and environmental change on industries Companies’ competitiveness, profitability and valuations are increasingly driven by changing social and environmental pressures. The sorts of products consumers want to buy are changing, as are the expectations workers have choosing employers and the priorities voters express to governments through their votes. Understanding the implications of those changes has never been more important. Imbalances between companies and the societies they belong to have never been higher. Corporate profits are close to all- time highs. On the other hand, public sector indebtedness, national income inequality and environmental resource depletion are also close to all-time records. These imbalances are putting growing pressure on companies to adapt or flounder. Global business leaders recognise that challenge, reflected in their changing view of the most important risks facing their businesses, which have become dominated by social and environmental issues over the last decade (Figure 1). focused on developing practical tools to help our fund managers identify, track and integrate the implications of key social and environmental trends into their portfolio decisions. Our work on climate change provides an example of that logic, spanning objective assessment of pace of change and the monetary risks posed by accelerating action. In contrast, we are concerned that too much of the current investment in ESG is directed at simplistic products that do not deliver the benefits investors expect. Half or more of inflows into sustainability-labelled funds in 2017 were into exchange traded fund (ETF) products 2 . Virtually all of those ETFs rely on blunt use of third-party ESG ratings to adjust stocks’ weights in those indices. On the other hand, some active managers’ approaches to ESG integration do not appear to be much more thoughtful. ESG analysis is not a compliance activity or black- or-white question and cannot be distilled into a formulaic application of generic third-party conclusions to investment decisions. We believe that pressure from several directions will make superficial 2 We do not believe a single source tracking ESG product flows by category exists but separate analyses have put total sustainable fund asset inflows at $2.9bn (https://www.sustainableinvest.com/2017- rsi-review/) and inflows into ESG ETFs at $1.6bn (http://www.etf.com/publications/etfr/where-are-esg- flows?nopaging=1)