11 Investor Use Flashcards
(98 cards)
What are four benefits that SASB standards offer investors?
1) decision-useful, financially material data for benchmarking and evaluating company performance
2) data to inform analysis and understanding of sustainability risk at the portfolio level
3) a transparent, market-informed, and trusted framework for ESG integration to help generate sustainability data that aligns with investment strategy
4) a roadmap for sustainability-related engagement topics to discuss with portfolio companies, specific to their industry
A wide variety of individuals and organizations invest in capital markets, reflecting various strategies, risk tolerances, objectives, time horizons and sources of capital. What is a characteristic that all investors share?
They value information
The more opaque the company is about its operations and outcomes, the more difficult it is for investors to assess.
What are examples of how institutional investors may incorporate ESG information?
-to enhance their ability to generate alpha (i.e. increasing financial return beyond a benchmark)
-to manage risk and mitigate potential value loss
-to help deliver valuation and may yield superior risk-adjusted returns
What are examples of how asset managers may incorporate ESG information?
-a responsibility as part of their fiduciary duty / duty of care to include material sustainability information in its portfolio-level impacts
What are examples of how brokerage firms may incorporate ESG information?
-offer sustainable investing programs designed to support retail investors that want to “do well while doing good”
What are examples of how endowments, foundations, and high-net-worth individuals may incorporate ESG information?
-invest sustainably because they want to have a positive impact and/or align their investments with their philosophical views or organizational missions
What are examples of how other investors may incorporate ESG information in seeking “dual returns”?
investments that generate both alpha-generating / risk-reduction benefits and mission alignment. Instead of a tradeoff of “value” and “values”, invest in a way that enhances financial value while aligning with ethical, philosophical, religious or other moral values.
What are five questions that exemplify how SASB Standards can help investors achieve their unique goals?
1) how do sustainability issues impact the core value drivers in industry-level analysis?
2) how do emerging sustainability risks and opportunities unfold over the investment time horizon?
3) how do companies leverage opportunities or mitigate risks related to material sustainability issues? how can sustainability issues be integrated into firm-level analysis either on a comparative basis or in terms of fundamental valuation?
4) how do differentiated, industry-specific sustainability factors affect a portfolio across all sectors? Which sectors or industries are facing sustainability headwinds or tailwinds?
5) how do sustainability issues impact key signals of risk and return pertinent to underwriting decisions?
How do UBS and Nordea Asset Management use SASB Standards in their investment processes?
-UBS incorporates it into traditional fundamental analysis to audment and help identify equities that are both attractively priced today and poised to deliver returns over the long term
-Nordea integrates into investment strategy, fundamental analysis, and valuation analysis in stock selection when building and adjusting the firm’s emerging market equity fund
When State Street Global Advisors uses SASB to power the R-Factor, what is it and what does it do?
An ESG scoring system for listed companies that is fully integrated into its asset stewardship program, enabling focused corporate engagement and emporting boards and management teams to assess and address specific sustainability dimensions
How does standardization of sustainability disclosure save investors time, improve price discovery and market efficiency?
They shift from time-intensive process of adjusting non-comparable information to fit into their own models and frameworks the analyzation and interpretation of the information. To the extent sustainability information and financial statements are reported together, it can also reduce reporting friction and contribute to more efficient markets.
What are the two high level areas related to a spectrum of the use of sustainability information by investors?
1) finding common ground
2) a range of investment strategies
What is the high level description of the two sustainability investment strategies drawn from commonalities of a number of institutional, bank and asset management sources?
1) Exclusionary or negative screening - making decisions to avoid an objectionable or low-performing investment such as weapons manufacturing or tobacco
2) prioritization or positive screening - making decisions about which investments to actively select such as beverage manufacturers that prioritize managing water risk
Though dichotomous, are the two approaches to sustainability investing mutually exclusive? Why or why not?
They are not mutually exclusive and are often combined, often depending upon the asset classes or industry. Most investors will use an exclusionary investment strategy in companies demonstrating risky behavior or poor risk management even if their strategy does not center on it.
What is the umbrella term referring to the earliest uses of sustainability information in investing? And what were the first practices?
Socially responsible investing
Often entailed exclusing investments affiliated with geographic conflicts (apartheid) and operating in “sin stock” industries
Name the seven sustainable investment strategies and categorize them as either exclusionary or inclusionary.
Exclusionary:
-values-based screens
-norms-based screens
Inclusionary:
-positive screening - best in class application
-positive screening - ESG Momentum approach
-thematic investing
-impact investing
-ESG integration
What is the difference in values-based and norms-based screens? And when does the screening happen?
Values-based screens aim to avoid investments based on the beliefs or ethical standards of the investors (e.g. screen out “sin stocks” or avoid geographies for human rights concerns)
Whereas norms-based screening tends to exclude investments based upon company’s behavior regarding internationally accepted norms and standards surrounding human rights, labor practices and other issues (e.g. BP oil spill or Volkswagon emissions scandal); investors sometimes rank such events according to their severity
The screen typically takes place before any investment analysis
Why do some investors set a limit on revenue generation from a line of business as part of the exclusionary screening strategies?
Values-based exclusionary decisions are not black-and-white or yes/no decisions. Some otherwise attractive investments have small subsidiaries involved in alcohol or with cocoa-sourced products that make up a small fraction of the total product mix, and so investors may set a limit of 5, 10 or 30 percent of total revenue.
Describe the difference between best-in-class and momentum positive screening and which one has newer companies.
Best-in-class refers to the selection of companies that meet a defined ESG performance hurdle, usually measured by an ESG score or ranking and the theory assumes that companies that demonstrate effective management of financially material ESG will outperform financially.
Momentum strategies, sometimes called directional strategies, target companies that do not meet top performance hurdles but that demonstrate recent, significant improvement in ESG performance, with the theory that by over-weighting companies likely to experience significant jumps in performance, they can realize larger gains than the marginal / often diminishing best-in-class approach. This approach is good for new companies.
Which type of sustainability investment strategy can influence corporate behavior by creating a competition among companies on sustainability measures?
Positive screening for momentum or directional strategies because it can look at the scores over a two-to-four year period to calculate a momentum factor
Describe ‘thematic investing’ strategy and what thematic investors often experience as a result of this strategy
Investors optimize allocation to a specific ESG issue or broader sustainability trend such as renewable energy technology, social entrepreneurship or water resource stewardship.
Thematic investors often experience a high tracking error given the focused approach, where there is a measurable difference between the returns expected by the investor and the returns received.
Describe how impact investing is different than strictly values-based or thematic approach, and what are the three characteristics of it per the FSA curriculum.
Impact investing considers sustainability information in investment products and strategies with the goal of creating positive impacts alongside financial returns.
The three characteristics are:
1) Intention - an impact investor acts with the explicit goal of achieving social or environmental impact versus if an investment inadvertently generats positive ESG returns
2) Impact measurement - impact generated by the investment is nearly always measured and reported to assess whether the investment achieved the desired impact and performance is tracked through qualitative and quantitative impact data
3) Impact management - data informs decision-making with the goal of mitigating negative impacts and maximizing positive outcomes. Financial returns are considered, but impact investing often expects that returns may range from below market to market rate versus traditional investing.
Describe thematic bonds and what it means when they have an impact hurdle
A practice of impact investing such as green bonds, climate bonds, social bonds, and sustainability-linked bonds, created to fund projects that generate positive impacts that are identical to traditional bonds in terms of structure, risk, and return while differing on adhering to specific additional criteria and reporting requirements.
An impact hurdle stipulates the rate at which investors will be paid back based upon a bond’s ability to achieve pre-defined impact targets.
Green = financing renewable energy or sustainable infrastructure
Social = education access or prison reform
Sustainability = a combination of social and environmental impact
Describe the practice of ESG integration strategies and how its purpose is different from values investing strategies
ESG integration incorporates sustainability information into traditional securities selection alongside a mosaic of traditional financial factors, which allows the users to assess and adjust traditional materiality analysis using sustainability information. Examples are adjusting financial models for revenue, costs, off-balance-sheet liabilities or adjustments to capital cost.
The purpose is not to apply social or environmental values, but to consider whether ESG factors contribute to, or detract from, the financial prospects of a given investment opportunity.