Chapter 8: Integrated Portfolio Construction and Management

Question 1

Which is one of the most material ESG factors institutional investors need to address within strategic asset allocation strategies?

Answer 1

Climate change – and climate risk – has emerged as the most material ESG factor for institutional investors to address within asset allocation strategies. Climate risk is both systemic and local. It threatens the financial system and the global means of production as much as it poses risk on a more localized level for specific regions, sectors, and companies.

Question 2

Provide a definition and example of Sustainability bond.

Answer 2

Sustainability bonds allow issuers to offer more broadly defined bonds that still create a positive social or environmental impact. In 2016, Starbucks issued the first US corporate sustainability bond of USD500 mn (GPB359 mn) that directly links the company’s coffee sourcing supply chain to ESG criteria.

Question 3

What is the Worldwide Governance Indicators project?

Answer 3

The Worldwide Governance Indicators project reports aggregated and individual governance indicators for over 200 countries for six dimensions of governance, which include: political stability, voice and accountability, government effectiveness, rule of law, regulatory quality, and control of corruption.

Question 4

What are idiosyncratic exclusions?

Answer 4

Idiosyncratic exclusions are exclusions that are not supported by global consensus. For example, New Zealand’s pension funds are singularly bound by statutory law to exclude companies involved in the processing of whale meat products.

Question 5

Dynamic Asset Allocation

Answer 5

is an investment strategy premised on long-term asset allocation but employing short-term, tactical trading to maintain investment allocation targets.

Question 6

Risk mitigation

Answer 6

describes a strategy or effort to manage and minimize a portfolio’s exposure to ESG risks. _____ extends from embedding robust review processes within risk management to actively minimizing the portfolio’s exposure to ESG risks. These risks are typically tail or long-term risks, for instance, in carbon heavy or stranded assets.