Chapter 1: Introduction to ESG Investing

Question 1

List the key lessons in the chapter

Answer 1

In this chapter, we learn about:
1) ESG investing,
2) Types of Responsible Investment
3) Macro-Level Debate of ESG Integration
4) Financial Materiality of ESG Integration
5) Challenges in Integrating ESG Factors
6) ESG Factors’ Influence on Financial Performance
7) Putting ESG INvesting into Practice

Question 2

ESG Investing

Answer 2

___ is an approach to managing assets where investors explicitly acknowledge the relevance of environmental, social, and governance (ESG) factors in their investment decisions, as well as their own role as owners and creditors, with the long-term return of an investment portfolio in mind. It aims to correctly price social, environmental, and economic risks and opportunities.

Question 3

Environmental Factors

Answer 3

Factors pertaining to the natural world. These include the use of and interaction with renewable and non-renewable resources (e.g., water, minerals, ecosystems, and biodiversity).

Question 4

Social Factors

Answer 4

Factors that affect the lives of humans. The category includes the management of human capital, non-human animals, local communities, and clients.

Question 5

Best-in-class ESG Investing

Answer 5

_____ involves selecting only the companies that overcome a defined ranking hurdle, established using ESG criteria within each sector or industry.

Question 6

ESG investing

Answer 6

___ is an approach to managing assets where investors explicitly incorporate environmental, social, and governance (ESG) factors in their investment decisions with the long-term return of an investment portfolio in mind.

Question 7

What does ESG investing aim to?

Answer 7

ESG investing aims to correctly identify, evaluate, and price social, environmental, and economic risks and opportunities.

Question 8

Governance Factors

Answer 8

Factors that involve issues tied to countries and/or jurisdictions or are common practice in an industry, as well as the interests of broader stakeholder groups.

Question 9

What does short-termism covers for the purpose of ESG investing.

Answer 9

____ covers two main practices: 1) trading practices based on short-term momentum and price movements rather than LT value, 2) investors engaging with companies in way that prioritizes maximizing quarterly earnings.

Question 10

What did the Kay Review (2012) find?

Answer 10

It found that short-termism may leave companies less willing to take on projects that may take multiple years.

Question 11

Shareholder Rights Initiative

Answer 11

The SRD was issued by the European Union (EU) in September 2020, requiring investors to be active owners and to act with a more long-term focus.

Question 12

Responsible Investment vs ESG investing.

Answer 12

ESG investing is a type of Responsible Investment. ESG investing is concerned with how ESG issues can impact the long-term return of assets and securities, whereas other responsible investment approaches can also take into account non-financial value creation and reflect stakeholder values in an investment strategy

Question 13

Types of Responsible Investment

Answer 13

SRI, Best-in-Class, Sustainable Investment, Thematic Investment, Green Investment, Social Investment, Impact investing, Ethical or Faith-based.

Question 14

Shareholder engagement

Answer 14

___ reflects active ownership by investors in which the investor seeks to influence a corporation’s decisions on ESG matters, either through dialogue with corporate officers or votes at a shareholder assembly (in the case of equity).

Question 15

Efficacy of Shareholder engagement depends on…

Answer 15

…the scale of ownership, 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.

Question 16

SRI

Answer 16

One of the subsets of ESG investing. Generally used as a catch-all term for investments made with a conscious desire for lower exposure to assets deemed to be less sustainable or responsible and/or increased exposure to those displaying greater sustainability or responsibility.

Question 17

Provide a description of an SRI process

Answer 17

Investors implementing SRI generally 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.

Question 18

Thematic investment

Answer 18

___ refers to selecting companies that fall under a sustainability-related theme, such as clean technology, sustainable agriculture, health care, or climate change mitigation.

Question 19

Green investment

Answer 19

___ refers to allocating capital to assets that mitigate climate change, biodiversity loss, resource inefficiency, and other environmental problems.

Question 20

Social investment

Answer 20

___ refers to allocating capital to assets that address social challenges.

Question 21

Provide examples of social investments.

Answer 21

These can be products that address the bottom of the pyramid (BOP). “BOP” refers to the poorest two-thirds of the economic human pyramid, a group of more than four billion people living in poverty. Ex: micro-finance and micro-insurance, access to basic telecommunication, access to improve nutrition and health care, and access to (clean) energy.

Question 22

Impact investing

Answer 22

___ refers to investments made with the specific intent of generating positive, measurable social and environmental impact alongside a financial return (which differentiates it from philanthropy).

Question 23

Global Impact Investing Network (GIIN)

Answer 23

The GIIN focuses on reducing barriers to impact investment by building critical infrastructure and developing activities, education, and research that help accelerate the development of a coherent impact investing industry.

Question 24

Shareholder engagement

Answer 24

___ reflects active ownership by investors in which the investor seeks to influence a corporation’s decisions on ESG matters, either through dialogue with corporate officers or votes at a shareholder assembly (in the case of equity).

Question 25

Shareholder engagement efficacy usually depends on…

Answer 25

…the scale of ownership, the quality of engagement dialogue and method used, and whether the company has been informed by the investor that divestment is a possible action

Question 26

TBL

Answer 26

The triple bottom line (TBL or 3BL) is an accounting framework with three parts: social, environmental (or ecological), and financial (people, planet, and profit).

Question 27

CSR

Answer 27

___ is a broad business concept that describes a company’s commitment to conducting its business in an ethical way.