Chapter 1 pt 2 Flashcards
(42 cards)
1
Q
What are common challenges prior to implementing ESG investing?
A
- The perception that implementing ESG investing may have a negative impact on investment performance due to reduced investment universe
- The interpretation that fiduciary duty prevents investors from integrating ESG factors
- The advice given by investment consultants and retail financial advisers many times not having been supportive of products that integrate ESG factors
2
Q
Once the decision has been made to implement ESG investing what are the typical challenges?
A
- Lack of understanding of how to build an investment mandate that effectively promotes ESG investing or what the needs of asset owners are regarding ESG investing
- The impression that significant resources, which may be lacking in the market or may be expensive, are needed—including human resources, technical capability, data, and tools
- A gap between marketing, commitment, and delivery of funds regarding their ESG performance
3
Q
Describe more about why investment consultants and retail financial advisers don’t offer advice supporting ESG investing
A
- Fiduciary duty and perceived negative impact along with other reasons
- Base advice on narrow interpretation of investment objectives
- Asset owners and retail investors can ensure ESG factors are standing items in meetings
- Investor-led initiatives can also increase engagement with these actors to enhance their understanding of ESG investing and address barriers to its consideration in investment advice.
4
Q
What are some solutions for the lack of understanding of how to build an investment mandate with ESG
A
- International Corporate Governance Network (ICGN) established a Model Mandate Initiative
- Uni of Cambs Institute for Sustainability Leadership developed a toolkit for establishing long-term, sustainable mandates
- PRI published numerous guidance docs to support asset owners in incorporating ESG investing into manager selection and investment mandates
5
Q
What is a result of these challenges?
A
- ESG analysis often takes the form of a qualitative input that is used alongside traditional quantitative models.
- E.g. The portfolio manager might use the quality score just for information or might set a hurdle for a stock to be included in the portfolio.
- These types of risk metrics are less respected by portfolio managers than financial analysis because quantifying the input and its impact is generally a challenge
6
Q
What affect has research shown ESG factors have on corporate financial performance?
A
- ESG factors MAY influence financial performance
- Positive results- don’t know if cause by ESG factors
- 1/10 show negative relationship
- Create value for investors and companies by encouraging better ESG risk management and more sustainable business practices
- Meta-studies suggest that in most research papers there was a positive correlation between ESG performance and corporate financial performance including stock price
- But doesn’t hold for fund performance, asset management industry has not been able to systematically turn ESG analysis into alpha
7
Q
What were the conclusions from The University of Oxford and asset manager Arabesque in 2014 reviewed the academic literature on sustainability and corporate performance and found that out of the 200 studies analyzed
A
- 90% concluded that good ESG standards lower the cost of capital,
- 88% showed that good ESG practices result in better operational performance, and
- 80% showed that stock price performance is positively correlated with good sustainability practices
8
Q
Describe meta-study by NYU Stern and Rockefeller Asset Management analyzed 1,000+ research papers (2015–2020) on the relationship between ESG factors and financial performance. - Corporate financial performance (e.g., ROE, ROA, stock price)
A
- 58% showed a positive relationship
- 13% found no impact
- 21% had mixed results
- Only 8% showed a negative effect
9
Q
Describe meta-study by NYU Stern and Rockefeller Asset Management analyzed 1,000+ research papers (2015–2020) on the relationship between ESG factors and financial performance. - Investment performance (e.g., alpha, Sharpe ratio)
A
- 59% showed similar or better returns vs. traditional investments
- 14% found negative results
10
Q
Describe meta-study by NYU Stern and Rockefeller Asset Management analyzed 1,000+ research papers (2015–2020) on the relationship between ESG factors and financial performance. - For climate-focused ESG studies:
A
- 57% of corporate studies found positive results
- 65% of investor-focused studies showed neutral or better performance
- Only 13% reported negative outcomes
11
Q
Why is it thought that it is not so positive for fund performance?
A
- The alpha from ESG factors might be captured elsewhere in factor studies (and thus is “drowned out by noise”).
- The impacts of different ESG approaches in the various studies might cancel each other out.
- The costs of implementation consume the available alpha.
12
Q
How do institutional investors typically reflect ESG considerations?
A
- incorporating ESG factors into investment decision-making,
- through corporate engagement, and
- through policy engagement.
13
Q
How can Institutional investors typically reflect ESG considerations through Investment Decisions
A
- Asset owners can include ESG factors in their requests for proposal and consider them in their appointment process,
- Asset owners and some asset managers can embed ESG considerations into strategic asset allocation (SAA) .
- Asset managers and asset owners who invest directly can incorporate ESG issues into their security selection and portfolio management process.
14
Q
How do asset owners include ESG factors in their requests for proposal?
A
- Often supported by investment consultants, who can factor in asset managers’ ESG policy, implementation, and outcomes in their selection process,
- Can reassure themselves that their views on ESG issues are implemented by integrating them into investment mandates and monitoring processes.
15
Q
What is SAA?
A
- SAA is the process in which an investor chooses to allocate capital across asset classes, sectors, and regions based on their need for return and income and their risk appetite.
16
Q
How do asset owners incorporate ESG issues directly into their security selection and portfolio management process?
A
- using ratings to apply a filter or threshold, which rules potential investments in or out of the investment universe,
- integrating ESG issues in their financial and risk analysis,
- using ESG criteria to identify investment opportunities through a thematic approach (e.g., a water fund, impact investing)
17
Q
How can Institutional investors typically reflect ESG considerations through Policy Engagement?
A
- Investors can work with regulators, standard setters, and other parties (e.g., consultants and stock exchanges) to design a financial system that is more sound and stable, levels the playing field, and brings ESG factors more effectively into financial decision making.
- Investors can respond to policy consultations, participate in collective initiatives, and make recommendations to policymakers.
18
Q
What are the United Nations Initiatives?
A
- United Nations Global Compact
- United Nations Environment Programme Finance Initiative
- Principles for Responsible Investment
- United Nations Framework Convention on Climate Change
- UN Sustainable Development Goals
- Glasgow Financial Alliance for Net Zero
19
Q
Describe the UNGC
A
- United Nations Global Compact
- Founded in 2000
- Collaboration between leading companies and the UN
- Claims to be the largest corporate sustainability initiative in the world, over 8000 corporate signatories
- 10 principles from broader global standards e.g. Universal Declaration of Human Rights, International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work
- Cover human rights, labour, environment and anti-corruption
Provides investors with principles to assess and engage with companies and directly aids companies
20
Q
Describe the UNEPFI
A
- United Nations Environment Programme Finance Initiative
- Partnership between UNEP and global financial sector
- Started 1992 with few banking institutions
- Aim to mobilise private sector finance for sustainable development
21
Q
What frameworks have the UNEPFI established or cocreated?
A
- The Principles for Responsible Investment, established in 2006 by UNEP FI and the UNGC and applied by more than half the world’s institutional investors by assets under management
- The Principles for Sustainable Insurance (PSI), established in 2012 by UNEP FI and applied by about one-quarter of the world’s insurers and by 25% of world premium volume
- The Principles for Responsible Banking (PRB): As of April 2024, more than 330 banks have signed up to the PRB, representing more than half of the global banking sector.
22
Q
describe the PRI
A
- UN-supported international network of investors—signatories working together toward a common goal to understand the implications of ESG factors for investment and ownership decisions and ownership practices.
- Provides support in 4 areas and has 6 voluntary principles
- Also leads or establishes partnerships with other organizations to develop initiatives, such as a review of fiduciary duty around the world and the establishment and implementation of the Sustainable Stock Exchanges Initiative.
- Many workstreams supported by committees made of members which is key for investors to gain further insight and contribute to development of knowledge
- Membership of PRI = Badge for being responsible investor
- Requires members to report annually on responsible investment practices which is assessed by PRI, report availble to public but assessment private to the member 7. Has minimum requirements to be a member
- More than 5000 signatories
23
Q
What are the 4 main areas that the PRI provides support?
A
- a broad range of tools and reports on best practices for asset owners, asset managers, consultants, and data suppliers, supporting the implementation of the principles across all asset classes and providing insights into ESG issues.
- It hosts a collaborative engagement platform, by which it leads engagements and also enables like-minded institutions to coordinate and take forward engagement with individual companies and sectors.
- Reviews, analyses, and responds to responsible investment-related policies and consultations. It also provides a policy map to investors and facilitates communication between investors and their regulators on the topic of responsible investment.
- Develops, aggregates, and disseminates academic studies on responsible investment-related themes.
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Q
What are the 6 voluntary principles of the PRI?
A
- We will incorporate ESG issues into investment analysis and decision-making processes.
- We will be active owners and incorporate ESG issues into our ownership policies and practices
- We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- We will promote acceptance and implementation of the principles within the investment industry.
- We will work together to enhance our effectiveness in implementing the principles.
- We will each report on our activities and progress towards implementing the principles
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hat are the 3 requirements to be members of the PRI?
1. Investment policy that covers the firm’s responsible investment approach, covering >50% of assets under management (AUM)
2. Internal or external staff responsibility for implementing responsible investment policy
3. Senior-level commitment and accountability mechanisms for responsible investment implementation
26
What is the UNFCCC?
1. The United Nations Framework Convention on Climate Change (UNFCCC)
2. Launched at the Rio de Janeiro Earth Summit in 199
3. Aims to stabilize GHG concentrations to limit man-made climate change
4. The UNFCCC hosts annual Conference of the Parties (COP) meetings, which seek to advance member states’ voluntary agreements on limiting climate change.
27
Which two COPS are most important?
1. The COP3 meeting in Kyoto in 1997, which created the Kyoto Protocol. This commits industrialized countries to limit and reduce their GHG emissions in accordance with agreed individual targets.
2. The COP21 meeting in Paris in 2015, which led to the Paris Agreement. This commits developed and emerging economies to strengthen the response to the threat of climate change by keeping a global temperature rise this century well below 2°C (3.6°F) above pre-industrial levels.
3. The Paris Agreement had a significant impact on investors, including government and civil societies’ expectations of them.
4. This has led to investor-led initiatives to understand how to become aligned with the Paris Agreement, as well as various organizations engaging with investors on the topic.
28
Describe the SDGs
1. UN Sustainable Development Goals
2. Agreed by all UN members in 2015
3. Blueprint to address key global challenges e.g. Poverty, inequality climate change, environmental degradation, peace and justice
4. 17 goals are interconnected and aimed at governments (9 environmental, 8 are social)
5. Paris agreement is one of its goals
6. Some investors report against their impact on SDGs
29
Describe GFANZ
1. Glasgow Financial Alliance for Net Zero
2. launched in 2021 by Mark Carney, UN Special Envoy for Climate Action and Finance and UK Prime Minister Johnson’s Finance Adviser for COP26, and the COP26 Private Finance Hub in partnership with the UNFCCC Climate Action Champions, the Race to Zero campaign, and the COP26 Presidency.
3. brings together existing and new net-zero finance initiatives across banking, insurance, and asset management in one sector-wide coalition.
4. It provides a forum for its several hundred members in over 50 countries to accelerate the transition to a net-zero global economy
30
What is the Race to Zero
1. A UN-backed global campaign allying non-state actors—including companies, cities, regions, and financial and educational institutions—to take rigorous and immediate action to halve global GHG emissions by 2030
2. All members are committed to the same overarching goal: reducing GHG emissions across all scopes swiftly and fairly in line with the Paris Agreement, with transparent action plans and robust near-term targets.
31
What are some of the ESG-related reporting initiatives?
1. Global Reporting Initiative
2. International Sustainability Standards Board (ISSB)
32
What is the GRI?
1. Global Reporting Initiative
2. publishes the GRI Standards, which provide guidance on disclosure across environmental, social, and economic factors for all stakeholders, including investors, whereas the other major frameworks are primarily investor focused.
3. Several thousand organizations worldwide use the GRI framework, which is among the most well known and is the standard for the United Nations Global Compact.
4. The framework covers the most categories of sustainability activity and encourages anecdotes and further prose to help contextualization.
33
What are some Climate-related Initiatives?
1. Task Force on Climate-Related Financial Disclosures
2. Asia Investor Group on Climate Change
34
What is the ISSB
1. International Sustainability Standards Board (ISSB)
2. In 2021, the IFRS Foundation Trustees announced the creation of a new standard-setting board
3. The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.
4. ISSB reporting standards took effect on 1 January 2024.
5. Individual jurisdictions are deciding whether and when to adopt the standards
35
What is the TCFD?
1. The Financial Stability Board’s TCFD takes the Paris Agreement’s target of staying well under 2°C (3.6°F), with the ambition of staying under 1.5°C (2.7°F), and tries to operationalize it for the business world.
2. The TCFD has been sunset as an independent organization, with its monitoring responsibilities transferred to the ISSB.
3. However, the TCFD framework continues to be highly relevant because its recommendations are fully integrated into the new ISSB standards (IFRS S1 and S2).
4. Many countries have incorporated TCFD principles into their own climate disclosure regulations, ensuring the framework’s ongoing impact on global climate-related financial reporting.
36
What does the June 2017 report by the TCFD urge companies to disclose against
1. Governance—the organization’s governance around climate-related risks and opportunities
2. Strategy—the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning
3. Risk management—the processes used by the organization to identify, assess, and manage climate-related risks
4. Metrics and targets—the metrics and targets used to assess and manage relevant climate-related risks and opportunities
5. The emphasis that the TCFD puts on climate change as a board-level issue is its greatest contribution
37
What is the AIGCC
1. Asia Investor Group on Climate Change (AIGCC)
2. An initiative to create awareness among Asia’s asset owners and financial institutions about the risks and opportunities associated with climate change and low-carbon investing.
3. AIGCC provides capacity for investors to share best practices and to collaborate on investment activity, credit analysis, risk management, engagement, and policy.
38
What is the GIIN
1. The Global Impact Investing Network (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.
2. It facilitates knowledge exchange, highlights innovative investment approaches, builds the evidence base for impact investing, and produces tools and resources.
3. Of note are its databases IRIS+ (of metrics for measuring and managing impact) and ImpactBase (of impact investing funds
39
What is the GSIA?
1. The Global Sustainable Investment Alliance
2. Many countries have a national forum for responsible investment
3. GSIA is an international collaboration of these membership-based sustainable investment organizations. It is a forum itself for advancing ESG investing across all regions and asset classes.
4. Core members of the GSIA include representatives from the regional responsible investment forums of Europe, the United States, Canada, Japan, Australia, and New Zealand.
5. The GSIA reports draw on in-depth regional and national reports and work from GSIA members.
40
What is the ICGN?
1. International Corporate Governance Network
2. Investor-led organisation which promotes effective standards of corporate governance and investor stewardship to advance efficient markets
3. developed two key guidance documents for investors: one on stewardship and another on investment mandates.
41
What is the CFA Institute Global ESG Disclosure Standards for Investment Products?
1. In 2021, CFA Institute published the Global ESG Disclosure Standards for Investment Products, the first global voluntary standards for disclosing how an investment product considers ESG issues in its objectives, investment process, and stewardship activities.
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