Chapter 8 pt 2 Flashcards
(47 cards)
1
Q
What should an ESG policy first do?
A
- Outline the investment approach and degree of integration in a firm
2
Q
What is the role of analysts in developing ESG integration?
A
- Analysts (particularly fundamental analysts) present and justify investment recommendations for securities, which typically incorporate
a. estimates of the security’s intrinsic value,
b. credit analysis,
c. the potential for a re-rating or de-rating in valuation,
d. potential risks,
e. short-term and long-term catalysts, and
f. an expectation on the security’s earnings growth, credit, and cash flow profile.
3
Q
What is the role of a portfolio manager?
A
- Broader than analysts
- Using analysts’ recommendations, form their own views for a given security and weigh security-specific factors against
a. macro- and microeconomic data,
b. portfolio financial and nonfinancial exposure,
c. sensitivities to potential shocks,
d. the appropriate overall portfolio risk.
4
Q
What is the challenge that portfolio managers face?
A
- how to widen the focus of research and datasets largely optimized for security analysis into tools that can better inform portfolio and asset allocation analysis and decision making,
- particularly in understanding where and how ESG factors contribute to risk-adjusted returns.
5
Q
What should an ESG framework include to illustrate a continuity from micro (Individual-level ESG analysis) to macro (broader portfolio) forms of analysis?
A
- the organizing principles and methodologies for ESG analysis,
- Security level analysis: the identification and analysis of financial and nonfinancial (ESG) materiality specific to individual stocks or bonds
- Portfolio-level risk analysis: how those individual security risks combine into total portfolio ESG exposure.
- Multi-asset strategy integration: the representation of ESG risks and exposure that informs a mixed asset strategy, which may include many different underlying strategies.s.
6
Q
What are the two different forms of ESG integration that will take place depending on the investment strategy?
A
- Discretionary ESG investment strategies most commonly take the form of a fundamental portfolio approach.
- Systematic ESG investment strategies are, broadly speaking, rule-based approaches that use the statistical application of financial and/or nonfinancial factors to drive security selection.
7
Q
What is a Discretionary ESG investment strategy
A
- These are actively managed strategies where portfolio managers make individual decisions based on deep research.
- complement bottom-up financial analysis alongside the consideration of ESG factors to reinforce the investment thesis of a particular holding.
- The portfolio manager would then work to understand the aggregate risk at the portfolio level across all factors to understand correlation and event risks and potential shocks to the portfolio.
8
Q
Describe Systematic ESG investment strategies
A
- minimize the higher costs associated with discretionary active management.
- These are quantitative or rule-based strategies that use algorithms or models to apply ESG criteria consistently across many investments.
- Where discretionary strategies often focus on depth in a portfolio, manifested through a portfolio of few, more concentrated holdings, quantitative strategies focus on breadth, using a much larger portfolio of holdings to target risk and volatility-adjusted returns.
- Historically most common were index based- replicating exposures of a custom index which have exclusion criteria
- But becoming more sophisticated e.g. Beta-plus funds and single- and multi-factor ESG models
9
Q
What is the market for ESG content and indexes?
A
surpassed USD1 billion in 2022
10
Q
Give list of external resources:
A
- sell-side research and analysis, (e.g., MSCI, S&P Global, Sustainalytics, investment banks)
- academic studies,
- investment consultant research,
- third-party ESG data provider research,
- ESG-integrated fund distribution platforms,
- asset owner and asset manager white papers,
- investor initiative research,
- nongovernmental organization (NGO) research,
- government agencies and central banks, and
- multilateral institutions and agencies.
11
Q
What is a less developed area where investors can innovate and differentiate themselves?
A
demonstrating how ESG considerations are embedded in their portfolio construction and management process.
12
Q
What can help with investors demonstrating how ESG considerations are embedded in their portfolio construction and management process?
A
- Sustainability Accounting Standards Board (SASB, now part of ISSB)
- its framework and Materiality Map span issuer-specific materiality and overall portfolio exposure.
- However, while the SASB industry-based standards identify material issues, the SASB does not weight them for individual companies or industries.
- Such a determination must be made by the investor
13
Q
What has the SASB made that looks at ESG materiality?
A
- Sustainable Industry Classification System (SICS).
- Modeled after the Global Industry Classification Standard (GICS)
- SICS offers an improved industry classification standard that speaks directly to ESG materiality.
- SICS organizes companies according to their sustainability attributes, such as resource intensity, sustainability risks, and innovation opportunities
14
Q
What is the first step that many portfolio managers take to assess ESG of portfolio?
A
- upload their portfolios onto third-party ESG data provider online platforms, as available for the asset class in question.
- While these platforms vary in sophistication, they offer the first composite picture of a portfolio’s stock-specific risks on several potential ESG metrics.
15
Q
What are the 3rd party ESG data provider online platforms capable of?
A
- illustrating a portfolio’s mean exposure and weighting toward low-, mid-, or high-scoring companies on ESG metrics,
- producing a picture of the portfolio’s environmental and carbon exposure on a relative basis (for instance, expressed as weighted-average carbon intensity), and
- approximating an overall controversy or risk score for the portfolio
16
Q
Why are asset owners and managers moving beyond third-party ESG platforms?
A
- They recognize the limitations and subjectivity of third-party ESG data
- so they are building advanced analytics platforms that blend third-party and proprietary data to better analyze, report, and differentiate their ESG integration strategies.
17
Q
What do ESG analytical tools allow investment teams to do within a portfolio?
A
- break down and compare portfolio and benchmark ESG profiles
- sort assets by ratings
- view ESG distribution curves
- drill down into detailed ESG characteristics at the position level.
18
Q
What is Weighted-average carbon intensity?
A
- Weighted-average carbon intensity (WACI) measures a portfolio’s exposure to carbon-intensive companies on a position-weighted carbon exposure.
- It is a portfolio-level risk exposure measure, calculated as the carbon intensity (Scope 1 + 2 Emissions ÷ USD million revenues) weighted for each position in a portfolio.
- This metric can be used to tilt or overlay portfolios toward lower carbon exposure.
19
Q
What is the difference between EU and UK practices under TCFD regarding emission scopes?
A
- The EU’s SFDR includes Scope 1, 2, and 3 emissions
- current UK TCFD practice typically focuses on Scope 1 and Scope 2 emissions only
20
Q
What is PCAF?
A
- Partnership for Carbon Accounting Financials (PCAF) is a financial industry-led initiative, which helps financial institutions assess and disclose their GHG emissions.
- Through its Financed Emissions Standard, it provides detailed guidance for calculating the financed emissions from activities in the real economy
- objective of equipping financial institutions with standardized, robust methods for measuring financed emissions.
21
Q
How is attributed emissions of sovereign debt calculated?
A
- Like WACI, this is a portfolio-level risk exposure measure, but to be used for sovereign debt portfolios
- calculated as the carbon intensity (Scope 1 emissions ÷ purchasing power parity per US dollar million gross domestic product), weighted for each position in a portfolio.
- Can use PPP-adjusted GDP, seeks to link emission attribution to real economy impact
22
Q
What TCFD metrics are limited to listed equities and corporate bonds?
A
Metrics like carbon footprint based on enterprise value are applicable only to listed equities and corporate bonds
23
Q
Why must investors be cautious when using decarbonization metrics in multi-asset-class portfolios?
A
- Because not all asset classes have applicable TCFD metrics (e.g., securitized fixed income, municipals), and changes in allocation mix can affect overall carbon reporting
24
Q
How does foreign exchange (FX) volatility affect carbon intensity reporting?
A
- FX fluctuations can alter reported carbon intensity even if changes are due to currency movements rather than actual emissions, especially for corporates operating in multiple regions.
25
What is the limitation of using single-security ESG case studies in portfolio management?
1. They are anecdotal and do not provide systematic performance attribution for ESG exposure at the portfolio level.
2. Portfolio analytics typically provide performance analytics that describe regional, sectoral, and stock-specific performance attribution over a given period.
26
How can we investigate whether ESG scores reflect independent risk factors or known ones?
1. By comparing the factor exposure of companies with high ESG ratings to those with low ratings.
2. This means analyzing whether highly rated ESG companies also tend to have the same traits—such as being larger or more stable—as those that already score well under traditional investment models. If so, the ESG score might just be overlapping with those traits.
27
What is the oldest approach to ESG investing?
Screening
28
What appears to be the most predominant sustainable investing strategy?
1. Stewardship and engagement for first time
2. Different from past where it was divestment and exclusions
3. Now seek dialogue with targeted company or country and put engagement escalation processes in place
29
What are the 4 types of exclusion?
1. universal - global norms and conventions
2. conduct-related (company or country specific), labor infractions
3. faith-based, and
4. idiosyncratic exclusions - not supported by global consensus
30
Describe which institutions support tobacco exclusions
1. The WHO Framework Convention on Tobacco Control of 2003
2. The UN Global Compact (UNGC)- don't align with the SDG 3
31
Do asset owners or managers usually adopt exclusionary preferences?
1. Asset owners - generally reduce investable universe and might have return-generation implications
32
What is an asset owner with a highly visible exclusion list?
1. Norges Bank, through the Norwegian sovereign wealth fund (SWF), implements a highly visible exclusion list.
2. Norges Bank’s exclusion list has been adopted by other Norwegian asset owners and continues to influence the construction of exclusion lists among other Nordic asset owners
33
Which assets benefit from proxy voting and AGMs?
1. Only listed equities
2. Led by board of directors and managers who can alter ESG risk factor exposures
34
What might stewardship look like for assets that aren't listed equities
For fixed income, stewardship can include such actions as considering the implications for the cost of debt capital or negotiating bond covenant
35
Why do multi-asset investment strategies often invest in indexes?
They use indexes for practical reasons like cash management and ensuring liquidity in case investors redeem (withdraw) funds
36
Why is it difficult to apply ESG screens to all indexes?
1. Breaking down (or decomposing) indexes to apply ESG screens can be complex and expensive, especially for less liquid (thinly traded) indexes.
2. Investors may exempt certain indexes from ESG screening rules to keep portfolio management efficient.
37
What are the sub-asset classes under asset class of equity?
Global/regional
38
What are the index providers for global/regional equities?
1. MSCI - (MSCI ESG index series)
2. S&P (Dow Jones Sustainable) Index ESG - (DJ sustainability index series)
3. FTSE - (FTSE ESG Index Series & FTSE4Good Index Series)
5. Sustainalytics
39
What are the sub-asset classes for Fixed income?
1. Credit
2. Sovereign
3. Thematic: Green bonds
4. Thematic: SDG Sovereign Indices
5. Thematic: Climate
40
name the index provider for credit fixed income
1. MSCI: MSCI ESG Index Series
2. JP Morgan: ESG Global Corporate Index
3. Bloomberg: Bloomberg SASB ESG Indices
41
Name the index providers for Sovereign fixed income
1. FTSE: FTSE ESG Government Bond Index Series
2. JP Morgan: JESG Index product suite
42
Name the index providers for Thematic: Green bonds
1. Bloomberg MSCI : MSCI ESG index series
2. ICE: ICE BofA Green Index
3. Solactive: Solactive Green Bond Indices Series
43
Name the index providers for Thematic SDG Sovereign indices:
FTSE: FTSE Sovereign Sustainable Development Goals Index
44
Name the index provider for Thematic Climate
1. FTSE: FTSE ESG Index Series
Climate risk adjusted bonds
45
Name the sub-asset class of Global Real Estate:
Real assets- infrastructure and real estate
46
Name the index provider for Real assets- infrastructure and real estate
GRESB: GLIO/GRESB ESG Index
47
What are the challenges with ESG indexes?
1. Lack of a standardized methodology for ESG performance (different index providers use different criteria or weightings)
2. Limited transparency and disclosure of precise methodology
3. Difficulty in measuring ESG performance (E, S, and G factors are interconnected with one another and with fundamentals)
4. Lack of a long-term track record, which means that it is difficult to backtest performance across multiple market cycles
