Chapter 2: ESG Market Flashcards
Describe the history of sustainability?
- Bruntland Report published in 1987 introduced concept of sustainable development
- Rio 1992
- Sullivan Principles on Apartheid
Rank the ESG investment strategies from largest to smallest
1) Negative / Exclusionary screening
2) ESG integration
3) Corporate engagement and shareholder action
4) Norms-based screening (Ethical)
5) Best-in-class
6) Sustainability-themed
7) Impact
What is the most common ESG strategies around the world?
- Negative screening: Europe
- ESG integration: US, CA, AU and NZ
- Corporate engagement and shareholder action: Japan
What are asset owners?
○ Legal owner of asset
○ Make asset allocation decision based on own objectives + analysis
○ Can outsource asset management via investment mandate
- Pension funds, Insurance, Individual investors and banks
What are asset managers
- Not legal owner of the asset
- Fiduciary duty to client
- Make investment decisions pursuant to investment management agreement
What determines the EFFECTIVENESS of ASSET OWNER’s ability to steer investment towards ESG?
- NUMBER OF ASSET OWNERS implementing responsible investment
- TOTAL AUM
- QUALITY OF IMPLEMENTATION across scales
Who are the KEY STAKEHOLDERS for PENSION funds?
- EXECUTIVES : who manage the fund
- TRUSTEES: who hold ultimate fiduciary responsibility, similar to board of a company
- BENEFICIARIES/ members
BET
What can pension funds do to integrate long-termism?
- Integrate long-termism in their investment belief statement
- Set up investment mandate that places greater value on long-termism
- Demand long-term metrics from asset managers and underlying investees (assets)
What can asset managers do to work with ESG?
- Select securities and offer a portfolio of those to asset owners
- They influence ESG characteristics of the portfolio through selection, as well as engagement with investee companies
- Offer also new products indices and passive funds that integrate ESG
What are the principal tasks of policymakers?
- Maintain orderly financial markets
- Safeguard investments
- Orderly Expansion -> green bonds
What can policy makers do to promote ESG?
- Corporate disclosure
- Stewardship - Interactions between investors and investees, protect shareholders, stability of the market
- Asset owners - require pension funds to integrate ESG
What are the main challenges for ESG integration prior to integration?
- Perception that implementing ESG may have negative impact on financial performance
- Belief that fiduciary duty prevents ESG integration
- Bad advice from investment consultations and financial advisors; or hesitancy to recommend ESG investments
What are the main challenges for ESG integration once decision has been made?
- Lack of understanding to build an investment mandate that promotes ESG -> Model Mandate Initiative
- Perception that more resources are needed
- Gap between marketing, commitment and delivery of funds regarding ESG performance
–
- Lack of clear signals from asset owners that they are interested in ESG
- Narrow interpretation of invt objectives on which consultants and advisors base their advise to owners
- resources challenges (esp for investors who see ESG investing as separate from core investment process.. ie viewed as mktg or compliance task)
What are the main challenges for ESG integration in terms of technical resources?
- Data availability - Disclosure is challenging
- Modelling - Challenging to integrate ESG into traditional financial models, breakthrough changes, no historical patterns
- Valuation techniques - To adjust corporate valuations with e.g. ESG-based discount rate future cash flow, or valuation ratios (price-to-earnings or book value)
What is portfolio tilting and when is it used?
- Tilting means “overweighting” or “underweighting” sectors or companies in a portfolio
- Required in screening, divestment and thematic investment
