In August 2016, the Herald published an examination of KiwiSaver investments in cluster munitions, landmines and tobacco.

Prior attempts had been made to highlight these investments but for whatever reason, the Herald piece struck a chord.

KiwiSaver members and politicians reacted.

More important, so did providers and the 2017 Responsible Investment Benchmark Report by the Responsible Investment Association of Australasia showed how much.

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Between 2016 and 2017, NZ funds under management with an ESG filter leapt from 78.7 billion to 131.3b. In just months, KiwiSaver providers sold shares, changed their investment processes and in some cases switched to different underlying investment managers. None of these changes were trivial, or cheap.

The sleeping giant of KiwiSaver — its members — had stirred.

However, while there was plenty of noise, Financial Markets Authority (FMA) KiwiSaver transfer data showed very few members actually changed provider. Instead, providers changed themselves.

They saw potential for serious bottom-line problems, and priced those problems at a level making a concrete response an economic necessity. Welcome to the sharp end of ESG. ESG is the theory and practice of integrating environmental, social and governance issues within an investment process.

It is commonly and incorrectly regarded as giving weight to non-financial risk. But, for an investor, if a risk does not have a financial impact — immediately or eventually — it's not a risk. ESG risks may take more study to identify and evaluate — like the cost and reputational impact of repeat incidents of pollution or workplace accidents.

They may play out over a period longer than a financial quarter, like climate change. Or, they may have an additional dimension where there is risk not only in a business activity, but in the public's perception of it. Perception which can change direction rapidly, materially and do significant financial damage.

ESG-themed exchange traded funds have significantly outperformed the broader market in the latest record bull market

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All of this means ESG risk is often mispriced (or overlooked ). It can be mispriced by the market, which is what ESG-aware investors look for, so they can profit as the market catches up with the real value of a company's ESG practices.

Evidence that ESG and good returns do go together has started to emerge globally.

Research shows that companies with fewer reported ESG incidents outperform those with more. ESG-themed exchange traded funds have significantly outperformed the broader market in the latest record bull market. Prioritising investment in companies with lower carbon risk performs at least as well as, and is gradually outperforming, investing without that lens .

ESG risk can also be mispriced by investors and company management. The market moves against you, sooner or later. This is what happened with KiwiSaver.

These are big forces. That they are big, and can hit a company and its investors hard and fast, are increasingly recognised, for example:

● in commentary globally about the "economic inversion" of an increasing proportion of company valuation being tied up in intangibles such as brand and reputation, rather than property and equipment.

● in commentary here, from Rob Campbell on Linkedin, about the need for company directors to adopt "anticipatory governance" not hamstrung by past experience but guided instead by changing markets and an atypical conception of risk.

● in recent corporate governance documents from the NZX, FMA and Institute of Directors; and the NZ Productivity Commission; increasingly focused on the management and disclosure of ESG risk (shifting to a low emissions economy, in the Commission's case)

● in ongoing blurring of what is ESG and what is "normal risk" — most recently, in the financial consequences of a poor public perception of data privacy. Privacy is a social issue, but public concern about it had a swift and terrible impact on Facebook's share price.

ESG exponents say it is becoming — or is already — mainstream.

ESG research providers continue to be acquired by mainstream research companies. Investors of all types and sizes are adopting ESG policies and becoming members of organisations such as the United Nations Principles for Responsible Investment. The near future of ESG investing is to drop the prefix .

So, for companies and investors, not taking proper account of ESG risk — and being seen to do so — is itself a risk. Perhaps an existential one.

The corollary risk is saying you're ESG aware but not being able to substantiate it.

If ESG is part of your branding — and it makes sense that it is — then to be revealed as an emperor with no clothes is doubly damaging. Because you're not only out of step, but a hypocrite. If you have sold financial services partly through claimed ESG virtues, then the FMA may also wonder whether you've been misleading.

Even if you do intend to back up words with deeds, be careful with the rhetoric itself. For example, calling your approach "ethical".

Ethics are personal and it is very common for them to be contradictory. In the United States, a "biblically responsible" fund screens out companies supporting LGBT communities. Another targets companies promoting LGBT workforce equality. Both are in the ethical category.

Your narrative can also trip you up if you decide your ESG approach should include excluding certain activities — such as cluster munitions.

As the New Zealand Superannuation Fund has shown in its careful documentation for its exclusions, it is critical to explain where you have drawn the line, and why you have drawn it there.

It doesn't guarantee your decisions will be popular, but it does reduce the likelihood of unintended consequences for your investment process and confusion for your stakeholders.

• Mike Taylor is the chief executive of PIE Funds