Chapter 1 Flashcards
(51 cards)
1
Q
What is Responsible Investing:
A
- Responsible investment is an umbrella term for the various ways in which investors can consider ESG factors within security selection and portfolio construction.
- ESG investing is one part of this group
2
Q
Define ESG Investing:
A
an approach to managing assets where investors explicitly incorporate ESG factors in their investment decisions with the long-term risk-adjusted return of an investment portfolio in mind.
3
Q
What is ESG investing’s primary concern
A
- How ESG issues can impact the long-term return (LTR) of assets and securities - Shareholder value
4
Q
What are some adverse affects of short-termism
A
- May promote stock market bubbles, financial instability, economic underperformance
- Make companies less willing to take on projects (R&D) that may take several years and patient capital to develop
- Tend to ignore factors that are considered more long term such as ESG factors
5
Q
What is an example of regulation to combat short-termism?
A
- Shareholder Rights Directive (SRD) was issued by the European Union (EU) in 2020
- Requiring investors to be active owners and to act with a more long-term focus.
6
Q
What are the 4 types of investing in order of being increasingly interested in aligning their capital with contributing to positive environmental and/or social outcomes.
A
- Philanthropy
- Impact Investing
- Sustainable and Responsible investing
- Traditional Investing
7
Q
Describe Philanthropy
A
- Approach: traditional/venture philanthropy
- Focus: Societal challenges through donations or grants
- ESG metrics: none
- Return expectations: social return expectations only - no financial market return expectations
- Challenges: Very specific social expectations
- Advantages: Not adherent to meeting return expectations
8
Q
Describe Impact investing:
A
. Approach: Social investing/impact investing
2. Focus: Investment with an intent to have a measurable environmental and/or social outcome
3. ESG metrics: Use of systematic ESG metrics and methodologies
4. Return expectations: social and financial market return expectations
5. Challenges: Reduced opportunity set, difficulty measuring true impact
6. Advantages: Very specific investment impact objective
9
Q
Describe Sustainable and Responsible Investing
A
- Approach: ESG Investing (screening/thematic/integration/stewardship)
- Focus: Enhance long-term value via ESG factors considerations for risk mitigation and/or identifying investment opportunities
- ESG metrics: Use of systematic ESG metrics and methodologies
- Return expectations: ESG risk-adjusted financial market return expectations with focus on long term value
- Challenges: Proprietary research can provide a limited perspective, potentially leading to incomplete or misfocused analysis (ESG data quality and research limitations may impact decision-making). E.g. Not standardised ratings and research so inconsistencies
- Advantages: Fewer constraints than other ESG strategies and less likely to be rule based. May inform, in conjunction with ESG ratings, the investment decision-making process. Integration approaches may be more rigorous and systematic.
10
Q
describe Traditional Financial Investing:
A
- Approach: Conventional investing
- Focus: Maximizing financial returns subject to risk constraints. No explicit focus on social or environmental factors
- ESG metrics: None
- Return expectations: Financial market return expectations only
- Challenges: May miss ESG risk factors
- Advantages: No change to existing investment process
11
Q
What is Socially Responsible Investment (SRI)
A
- Approaches that apply social and environmental criteria in evaluating companies.
- Score companies using a chosen set of criteria, usually in conjunction with sector-specific weightings.
- A hurdle is established for qualification within the investment universe, based either on the full universe or sector by sector.
- This information serves as a first screen to create a list of SRI-qualified companies.
- Used in combination with best-in-class investment, thematic funds, high-conviction funds, or quantitative investment strategies.
12
Q
What is Best-in-class Investment?
A
- (also known as “positive screening”) involves selecting only the companies that overcome a defined ranking hurdle, established using ESG criteria within each sector or industry.
- Typically, companies are scored on a variety of factors that are weighted according to the sector.
- The portfolio is then assembled from the list of qualified companies.
- BUT not all best-in-class funds are considered “responsible investments.”
- The goal is to prioritize ESG leaders while maintaining diversification across industries and regions.
- Since BIC includes all sectors, it does not exclude controversial industries like oil, mining, or tobacco—just the worst performers in those sectors e.g. Just targets top 25% in specific industr
13
Q
What are examples of social investment?
A
- micro-finance and micro-insurance,
- access to basic telecommunication,
- access to improved nutrition and health care, and
- access to (clean) energy.
14
Q
What is BOP
A
- “BOP” refers to the poorest two-thirds of the economic human pyramid, a group of more than four billion people living in poverty.
- More broadly, BOP refers to a market-based model of economic development that seeks to simultaneously alleviate poverty while providing growth and profits for businesses serving these communities.
15
Q
what is an example of Impact Investment
A
- investing in products or services that help achieve one (or more) of the 17 Sustainable Development Goals (SDGs) launched by the United Nations in 2015
- “SDG 6: Clean Water and Sanitation—Ensure availability and sustainable management of water and sanitation for all”
- “SDG 11: Sustainable Cities and Communities—Make cities and human settlements inclusive, safe, resilient and sustainable
16
Q
What does the efficacy of Shareholder engagement depend on?
A
- the scale of ownership (of the individual investor or the collective initiative),
- the quality of the engagement dialogue and method used, and
- whether the company has been informed by the investor that divestment is a possible sanction.
17
Q
What is Corporate Sustainability?
A
Corporate sustainability is an approach aiming to create long-term stakeholder value through the implementation of a business strategy that focuses on the ethical, social, environmental, cultural, and economic dimensions of doing business
18
Q
What is Corporate Social Responsibility?
A
- broad business concept that describes a company’s commitment to conducting its business in an ethical way.
- Until recently, many companies implemented CSR by contributing to society through philanthropy.
- Modern understanding of CSR recognizes that a principles-based behaviour approach can play a strategic role in a firm’s business model.
19
Q
What can effective management of the company’s sustainability do?
A
- reaffirm the company’s license to operate in the eyes of governments and civil society,
- increase efficiency,
- attend to increasing regulatory requirements,
- reduce the probability of fines,
- improve employee satisfaction and productivity, and
- drive innovation and introduce new product lines.
20
Q
Describe how the Global Risks have changed
A
- In the Global Risk Report 2024
- risks related to the environment have been significantly increasing in importance in recent years e.g. Extreme weather and Failure to address climate change
- clssic economic risks such as asset bubbles, financial failures and fiscal crises have disappeared from the top five risks.
- Among all global risks, climate now tops the agenda.
21
Q
How are companies experiencing risks in manufacturing
A
- Water depletion leads to higher costs as has been used inefficiently
- Increasing frequency of extreme weather events
22
Q
Give examples of companies who have experienced these risks
A
- Pacific Gas and Electric Company (PG&E), a listed US utility, was driven to bankruptcy proceedings due to wildfire liabilities
- Brazilian Aluminium Company (CBA) estimated that the water crisis in the second half of 2021 caused a reduction in its EBITDA of between US$27 million and US$33 million
- Assets can become stranded (obsolete) due to regulatory, environmental, or market constraints. In Peru, for example, social conflict related to disruptions to water supplies has resulted in the indefinite suspension of US$21.5 billion in mining projects since 2010
23
Q
What is the Freshfields report?
A
- United Nations Environment Programme Finance Initiative (UNEP FI) commissioned the law firm Freshfields to publish a report titled “A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment”
- established that ESG investing is legally permissible and potentially required under fiduciary duty as they can help investors better predict financial performance.
- However, many investors still hesitate to fully integrate ESG factors, citing fiduciary responsibility as a reason to prioritize financial returns over sustainability considerations.
24
Q
What did the PRI report conclude
Modern fiduciary duties require investors to do the following:
A
- Incorporate financially material ESG factors into their investment decision making, consistent with the time frame of the obligation.
- Understand and incorporate into their decision making the sustainability preferences of beneficiaries or clients,
- Be active owners, encouraging high standards of ESG performance in the companies
- Support the stability and resilience of the financial system.
- Disclose their investment approach in a clear and understandable manner, including how preferences are incorporated into the scheme’s investment approach.
25
What is the FSB
Financial Stability Board (FSB), the international body set up by the G20 to monitor risks to the financial system
26
What is the economic perspective for considering ESG issues?
1. Stems from the recognition that negative megatrends will, over time, create a drag on economic prosperity as basic inputs (such as water, energy, and land) become increasingly scarce and expensive
2. And that the prevalence of health and income inequalities increase instability both within countries and between the “global north and south.”
3. unless these trends are reversed, economies will be weakened.
4. Will not have big affect on asset managers as their success is based on their ability to outperform the market but will affect asset owners who depend on market returns to pay out pensions and meet their liabilities.
5. Asset owners rely on overall market growth so more exposed to systemic risks
27
What are some environmental megatrends
1. Climate change
2. Resource scarcity
3. Biodiversity loss
4. Deforestation
28
Describe how social issues can have economic impacts
1. High levels of income inequality can create social stresses, including security-related issues .
2. The World Economic Forum estimates that conflict and violence cost the world more than US$14 trillion a year.
3. Undernutrition is still common in developing economies and has severe economic consequences.
4 While the number of undernourished people in the world has declined sharply, about 1 out of 10 people suffers from chronic malnutrition
29
What are externalities
1. Pigou introduced concept
2. An externality is a cost or benefit that affects someone who is not directly involved in an economic transaction.
3. Externalities occur when the actions of individuals or businesses impact third parties, either positively or negatively, without compensation.
E.g pollution, climate change, education +, vaccinations
30
What is an example of client demand?
1. a group of asset owners launched the Net-Zero Asset Owner Alliance (now part of the Glasgow Financial Alliance for Net Zero) under the auspices of the UN,
2. committing to transition their investment portfolios to net-zero greenhouse gas (GHG) emissions by 2050.
31
What is the regulatory perspective of integrating ESG factors?
1. Since the mid-1990s, responsible investment regulation has increased significantly, with a particular surge in policy interventions since the 2008 financial crisis.
2. been driven by a realization among regulators that the financial sector can play an important role in meeting global challenges, such as combating climate change, modern slavery, and tax avoidance.
3. Among the world’s 50 largest economies, the PRI found that 48 have some form of policy designed to help investors consider sustainability risks, opportunities, or outcomes
32
What are positive impacts of ESG integration
1. reduced cost and increased efficiency,
2. reduced risk of fines and state intervention,
3. reduced negative externalities, and
4. improved ability to benefit from sustainability megatrends.
33
How do sustainable business build efficiencies?
1. Conserving resources
2. Reducing costs
3. Enhancing productivity
34
What are 3 companies who made savings from efficiency measures?
1. The Dow Chemical Company: long-established focus on cost reductions through resource efficiency enabled it to achieve savings of US$31 million on its raw materials alone, compared to a net income of approximately US$4 billion
2. General Electric: reduced its GHG emissions by 32% and water use by 45% compared to the 2004 and 2006 baselines, respectively. This resulted in savings of around US$300 million
3. Nike: modern cutting equipment which can achieve smaller gaps between cut parts saved 12 million dollars
35
Describe the reduced risk of fines and state intervention benefit of ESG integration
Typically, one-third of corporate profits are at risk from state intervention
36
Describe how much of Estimated Share of EBITDA at Stake and examples of why for the Automotive, aerospace and defense, technology industries
1. 50-60%
2. Government subsidies, renewable regulation, and carbon-emissions regulation
37
Describe how much of Estimated Share of EBITDA at Stake and examples of why for the Transport, logistics, infrastructure industries
1. 45-55%
2. Pricing regulation (regulated on ticket pricing fuel taxes etc) and liberalisation of the sector (opening to competition)
38
Describe how much of Estimated Share of EBITDA at Stake and examples of why for the telecom and media industries
1. 40-50%
2. Tariff regulation (forced to remove roaming fees), interconnection, fiber deployment, spectrum and data privacy
39
Describe how much of Estimated Share of EBITDA at Stake and examples of why for the Energy and Materials industries
1. 35-45%
2. Tariff regulation (capped prices), renewables subsidies, interconnection, and access rights
40
Describe how much of Estimated Share of EBITDA at Stake and examples of why for the resources industry
1. 30-40%
2. Resource nationalism, mineral taxes, land-access rights, community reach and reputation
41
Describe how much of Estimated Share of EBITDA at Stake and examples of why for the Consumer goods industry
1. 25-30%
2. Obesity, sustainability, food safety, health and wellness, and labeling
42
Describe how much of Estimated Share of EBITDA at Stake and examples of why for the pharmaceutical and health care industries
1. 25-30%
2. Market access, regulation of generic drugs (cheaper after patents expire), pricing, innovation funding, and clinical trials
43
What are 3 of the highest ESG-related fines in history
1. BP and Deepwater horizon: Oil spill in Gulf of Mexico in 2010, 20.8 billion
2. Financial crisis and Bank of America: role in subprime loan crisis
3. Volkswagen's Emission Scandal: emissions cheating with diesel as fuel for environmental efficiency
44
What is internalisation?
1. making businesses pay for the hidden costs of their actions.
45
What guidelines make it a legal duty for investors to consider human rights?
1. OECD Guidelines for Multinational Enterprises
2. UN Guiding Principles for Business and Human Rights Principles
46
How can internalisation happen?
1. market-based instruments (e.g., charges, taxes, and tradable permits),
2. regulation (e.g., vehicle emission and safety standards, traffic restrictions), or
3. voluntary agreements (e.g., agreements with the car industry to reduce CO2 emissions from new passenger cars).
47
Describe externalities and internalisaiton in Air travel
1. European Commission has been advocating for internalisation of externalities associated with transportation
2. In 2019 ministers of finance in EU states aske the EC to introduce a measure to offset CO2 emissions of planes
3. Tax could result in increase in ticket price and decline in demand leading to reduction in CO2 emissions
4. France and Switzerland implemented carbon taxes which funds will be invested in eco-friendly transport
5. Airfrance bought more efficient planes to negotiate with government
6. Price sensitivity for passengers is relatively low
7. Some flights banned if same journey can be made by train
48
What does the ETS DO
1. Emissions Trading System
2. requires all non-commercial operators who travel into, out of, and between EU and European Economic Area (EEA) member states to monitor their CO2 flight emissions
3. and purchase carbon allowances equal to the emissions on intra-EU flights
49
What are 3 widely recognised global megatrends?
1. Technological innovation =1/3 jobs replaced
2. Demographic changes and wealth inequality
3. Climate change and resource scarcity
50
Describe the demographic changes and wealth inequality megatrend
1. World's population expected to rise by more than 1 billion by 2030: increase demand for and stress on scarce resources
2. Population is getting older : Caring for elderly reshapes industries and pressure on government finances
3. Germany's population is expected to shrink and people of working age fall significantly
4. China's labour force peaked in 2012
5. 60% world's population lives in countries with fertility rates below replacement rate
6. Smaller, older workforce means productivity more important
7. Increasing wealth concentration and rising inequality contribute to depressed economic growth, criminal behaviour, and undermined educational opportunities
51
