Rotman International Journal of Pension Management

Volume 5 Issue 2

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Rotman International Journal of Pension Management Volume 5 • Fall 2012 Issue 2 Misadventures of an I r responsible Investor Jack Gray Jack Gray is at the Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney; Brookvine Pty Limited; and Rawson East P/L, Sydney (Australia). The ESG movement is nudging toward an unhealthy state of political correctness, one that brooks no criticism(and there ismuch, butmostly sotto voce). Boards spend excessive time on ESG relative to any expected benefits for the principals; managers cynically sign up to UNPRI else their business suffers; while principals, when given a choice, eschew the option. Nonetheless, ESG raises important questions about the very purpose of fiduciary investing, especially whether a pension fund has any social responsibility beyond generating the greatest risk-adjusted return for its beneficiaries. Jane Ambachtsheer, Stephen Davis, and Keith Johnston were invited to respond to Gray's views. Their comments follow immediately after this article. Keywords:ESG, Pension Fund, Social responsibility, Sole Purpose Test, Sustainability Irritations I was once arguing heatedly that boards of superannuation / pension funds spend excessive time on environmental, social, and governance (ESG) factors relative to their potential to improve members' benefits when my rant was interrupted by a trustee gently asking why I was so irritated (and irritating).1 I have a few answers. After some soul-searching, Some investors are irritated by the ever-changing names and nature of the topic. To them the plethora of acronyms – SRI (socially responsible investing), CSR (corporate social responsibility), PRI (principles of responsible investing), ESG, EI (ethical investing), ETI (economically targeted investing), II (impact investing)…– indicates a search for a catchy title. I side with the less cynical, who see it more as a healthy search for fundamental issues and modus operandi. The current version seems to be that "investors should better account for the often longer-term impact of environmental, social and governance factors on the future cash flows of their investments." Analysts and portfolio managers claim they have always accounted for such non-financial factors, the CEO's health and the likelihood of regulation being oft-cited instances. Investors in long- duration assets such as infrastructure have long recognized and been highly sensitive to all three of the letters E, S, and G. Nonetheless, the movement may have driven analysts and portfolio managers to go beyond the cosmetic to attach a modicum of substance to non-analytic factors. 8 Volume 5 • Issue 2 • Fall 2012 • 10.3138/rijpm.5.2.8 In principle, because the above definition eschews moral and ethical considerations unless they affect cash flows and valuations, it resides comfortably within the normal paradigm of economic rationalism. In practice, purely moral and ethical considerations continue to underlie much ESG discussion and decision making, regardless of their effect on cash flows. The current British Under-Secretary of the Department ofWorks and Pensions supports that practice, seeing "no reason why trustees [of pension funds] cannot consider moral and social criteria in addition to their usual [financial] criteria" (qtd. in Johnson and de Graaf 2009, 6) – considerations that can readily run counter to fiduciaries' responsibility to act solely in the best interests of beneficiaries.2 But even that narrow definition of ESG irritates, because boards do spend too much time on it relative to its potential to improve members' returns. One of the initiators of the United Nations Principles for Responsible Investing (UNPRI) pointedly suggested that because ESG doesn't detract from returns (a far from settled assertion), investors should be as responsible as possible. But this ignores the direct cost of acquiring ESG information and the indirect cost of spending less time on opportunities with greater potential benefits.A hallmark of committees is a predilection for avoiding difficult and uncertain tasks by instead focusing on those that make committee members feel good, or those that solve a problem well chosen for its simplicity and immediacy. ESG offers scope for both avoidance techniques. For example, by spending time favoring and selecting well-governed companies and countries,

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