Chapter 1: Introduction to ESG Flashcards
Define ESG Investing?
Investors explicitly acknowledge:
- Environmental
- Social
- Governance
factors into their investment decisions
-
Asset management approach that acknowledges importance of ESG in
- INVESTMENT DECISIONS
- own ROLE AS OWNERS
- own ROLE AS CREDITORS
Impact of ESG?
- Risk
- Volatility
- Long-term return
- Individual securities and market
Define Corporate Social Responsibility?
Broad concept that companies want to act in an ethical way.
What is Triple P accounting or Triple Bottom Line?
- People
- Planet
- Profit
Coined by John Elkington
also ‘Triple Bottom Line’
Expanding from profit –> includes social & environmental impacts to company
What is Responsible investment?
- Strategy and practice
- Integrate ESG into investment decisions
- Stewardship
- Considers how ESG factors impacts the risk-adjusted return of an asses and the stability of the economy
- ESG are taken into account to mitigate risk and focus on financial return
What are the main responsible investment strategies?
- Best-in-Class investing
- Socially responsible investing
- Sustainable investing
- Thematic investing
- Green investing
- Social investment
- Impact investment
- Ethical and Faith based investing
What is Best-in class Investment? (criteria, selection, diversification, tracking error, screening)
- Selecting a company that passes a pre-defined ranking hurdle and ESG criteria within sector and industry.
- Used in investment strategies that try to keep characteristics of an index and maintain regional or sectoral diversification.
- Low tracking error
What is Socially responsible investment? (criteria, selection, diversification, tracking error, screening)
- Applies social and environment factors in evaluating companies
- Investors score companies using criteria, usually in conjunction with sector-specific weighting
- Set hurdle for investable universe which serves as a screening for qualitied companies
What is Sustainable Investment? (criteria, selection, diversification, tracking error, screening)
- investment strategy that wants to contribute to sustainable economy and minimize resource depletion
- Could include best in class
- Could also mean investing in companies that have a positive impact.
- Screening
What is Thematic Investment? (criteria, selection, diversification, tracking error, screening)
- Selecting companies that fall under sustainable-theme, such as Cleantech
- Not all thematic investments are considered responsible investment
- Because companies may not comply with other ESG characteristics
What is Green Investment? (criteria, selection, diversification, tracking error, screening)
- Broad subcategory of thematic investment
What is Social Investment? (criteria, selection, diversification, tracking error, screening)
- Adresses bottom-of-the-period.
- Is a market-based instrument of economic development and poverty eliviation and
- includes invesmtments in micro-finance.
What is Impact Investment? (criteria, selection, diversification, tracking error, screening)
- Investment made with specific ESG impact and financial return (unlike philantrophy)
- Different return expectations.
What are the THREE factors impacting EFFICACY of SHAREHOLDER ENGAGEMENT?
Reflects active ownership by investors, seeking to influence companies decision impact ESG.
Efficacy depends on
- SCALE OF OWNERSHIP (individual or collective initiative)
- QUALITY OF ENGAGEMENT DIALOGUE & method used
- Whether company has been informed that DIVESTMENT IS a POSSIBLE sanction
SQUiD
How can ESG investing become FINANCIALLY MATERIAL?
- Reduced COST and increased EFFICIENCY
- Reduced RISK OF FINES and state interventions
- Reduced EXTERNALITIES
- Improved adaptability to MEGATRENDS
CERFEM
What are externalities?
- Production or consumption of a product or service’s private price equilibrium can’t reflect true costs of product of service for society as a whole
- When externalities are negative, private costs are lower than societal costs, leading to market failures.
How can CLIMATE CHANGE SOCIAL COSTS be INTERNALIZED by governments and markets? What instruments exist?
- MARKET-BASED instruments e.g. charges, taxes or tradeable permits
- REGULATORY instruments e.g. standards
- VOLUNTARY instruments
MRV
MaRV
What are megatrends?
- Urbanization and Emerging economies
- Technological disruption
- Demographic change
- Wealth inequality
- Climate change and resource scarcity
What do we know about ESG and financial performance?
- Overwhelming evidence indicates positive correlation between ESG and financial performance
- Positive correlation between ESG performance and stock price
- But no clear correlation between ESG and fund level performance
- Good ESG standards lower cost of capital
- Positive correlation operational performance
What can be considered modern ESG fiduciary duty?
○ Incorporate ESG factors in investment decision making
○ Incorporate sustainability preferences of beneficiaries or clients, regardless if these preferences are financially material
○ Be active owners, encourage high ESG standards in invested companies/assets
○ Support stability and resilience financial system
- Disclose investment approach and how preferences are incorporated
What are UNIVERSAL OWNERS, and why do they need to address ESG?
- Large institutional owners with highly diversified holdings across sectors and asset classes that represent the global market and investible universe
- Their investment returns depend on global economy
- Need to include ESG factors to account for megatrends
What are the Six Principles for Responsible Investment ?
- INCORPORATE ESG issues in investment analysis and decision making process
- ACTIVE owners and incorporate ESG in ownership policies and practices
- SEEK ESG DISCLOSURE in invested entities
- PROMOTE PRINCIPLES in investment industry
- WORK TOGETHER in implementing principles
- REPORTon implementation activities
IASPWR
IAS POWER
What are the minimum requirements for the PRI?
- Investment policies covering firm’s responsible investment policy covering >50% assets
- Internal or external staff responsible for implementing investment policy
- Senior level commitment and accountability mechanisms
What are the FOUR key areas for the UN GLOBAL COMPACT
- Environment
- Labor
- Human rights
- Anti-corruption
HEAL
