Chapter 8 pt 3 Flashcards
(51 cards)
1
Q
Describe the Stewardship and engagement across different asset classes:
A
- Listed equities: owners ahve proxy voting rights
- Corporate bonds: lenders cannot vote, accountability limited to terms in covenants, mostly engagement
- Sovereign: Lenders cannot vote, accountability limited to terms in covenants, mostly engagement
- Munis/ sub-sovereigns: Lenders cannot vote, accountability limited to terms in covenants, mostly engagement
- Structured Products: Lenders cannot vote, accountability limited to terms in covenants, mostly engagement
2
Q
Describe ability of integration for the asset classes:
A
- Listed equities: Yes
- Corporate bonds: yes
- Sovereign: yes
- Munis/ sub-sovereigns: yes
- Structured Products: yes
3
Q
Describe screening ability for the asset classes:
A
- Listed equities: yes
- Corporate bonds: yes
- Sovereign: limited scope due to a smaller opportunity set compared to corporate bonds
- Munis/ sub-sovereigns: limited scope due to a smaller opportunity set compared to corporate bonds
- Structured Products: Yes (negative screening remains the most widely adopted incorporation approach for European ESG-labeled collateralized loan obligations, or CLOs)
4
Q
Describe tilting ability for the asset classes
A
- Listed equities: Yes
- Corporate bonds: yes
- Sovereign: limited scope, more challenging
- Munis/ sub-sovereigns: limited scope, more challenging
- Structured Products: limited scope, more challenging
5
Q
Describe norms based for each asset class
A
- Listed equities: Yes
- Corporate bonds: yes
- Sovereign: limited scope, more challenging
- Munis/ sub-sovereigns: limited scope, more challenging
- Structured Products: limited scope, more challenging
6
Q
Describe thematic for each asset class
A
- Listed equities: yes
- Corporate bonds: yes
- Sovereign: yes (see labeled bonds)
- Munis/ sub-sovereigns: yes (see labeled bonds)
- Structured Products: Yes
7
Q
What is tilting?
A
adjusting the weight of certain assets or sectors in a portfolio based on Environmental, Social, and Governance (ESG) preferences or characteristics—without fully excluding them.
8
Q
How does ESG integration differ between fixed-income sub-asset classes and listed equities or investment-grade corporate bonds?
A
- ESG integration is uniformly applied across fixed-income sub-asset classes (sovereign, municipal, structured products), where it is often the dominant or only feasible method.
- By contrast, listed equities and corporate bonds use a broader mix of approaches (integration, screening, tilting, norms-based), so integration is less dominant in those categories.
9
Q
Which Fixed-income strategies have the greater number of higher ratings (esg1 & esg2) according to Mercer research?
A
- investment-grade credit
- , emerging market debt
- buy-and-maintain strategies
10
Q
Which Fixed-income strategies have the lower degrees of integration according to mercer research?
A
- government debt
- high-yield credit -reflect scarcity in ESG company ratings and data availability
11
Q
Describe the ESG evaluation framework developed by Bluebay Asset management
A
- Framework leverages third-party ESG data to produce proprietary issuer ESG metrics:
* The fundamental ESG risk metric examines fundamental ESG risk at the issuer level (company, government etc)
* The investment ESG score operates at the bond security level. considers varying credit risk sensitivities resulting from exposure to ESG risk factors (risk and opportunity) - Its value and differentiation for both internal investment teams and investors lies in elevating the picture of ESG risk from the individual bond to the single-issuer level - understanding ESG risk in a given credit portfolio
12
Q
What are new forms of ESG bond issuance and how do they work?
A
- Use-of-proceeds bonds (e.g., Green Bonds): Proceeds are earmarked for specific ESG-related projects (e.g., renewable energy, clean transport).
- Sustainability-linked bonds: Bond terms (like the coupon rate) are tied to the issuer’s progress on ESG targets. If targets aren’t met, penalties like higher interest rates may apply
13
Q
In 2023 describ distrubtion of sustainable bond issuance
A
- Green bonds: 550 billion
- Social bonds: 150 billion
- Sustainability bonds: 175 billion
- Sustainability linked bonds: 75 billion
14
Q
ive examples of green bond indices:
A
- S&P Green Bond Select Index,
- Bank of America Merrill Lynch Green Bond Index, and
- Bloomberg Barclays MSCI Green Bond Index.
15
Q
Describe sustainability bonds:
A
- Sustainability bonds allow issuers to offer more broadly defined bonds that still create a positive social or environmental impact.
- he funds raised must be used for specific green or social projects.
In 2016, Starbucks issued the first US corporate sustainability bond (USD500 million), which directly links the company’s coffee sourcing supply chain to ESG criteria.
16
Q
What are SDG-linked bonds?
A
- Although there is common overlap with green and social bonds, SDG-linked bonds enable issuers to raise capital by committing to and achieving specific SDG-related targets.
- Issuers are generally required to provide evidence and assurance for business alignment with the targeted SDGs.
17
Q
What is the greenium?
A
- the yield difference between a green/labeled bond and a regular bond from the same issuer.
- It reflects the extra demand and ESG value placed on labeled bonds.
- Labeled bonds may be more expensive (i.e., lower yield).
- Investors need to weigh the ESG benefit vs. the return tradeoff.
- Greeniums can affect portfolio performance and valuation decisions.
18
Q
What should investors consider with green bonds?
A
- green bond term structures,
- sector profiles,
- alignment with green bond frameworks?
19
Q
What risk is associated with longer-maturity green bonds?
A
Longer-maturity bonds have a higher duration, leading to greater interest rate volatility compared to shorter-duration bonds, making them more sensitive to interest rate changes.
20
Q
hat traditional risk measures should portfolio managers monitor when dealing with green bonds?
A
- term structure
- Duration
- credit risk
- capital structure
- along with the specific economic activities linked to the green bond
21
Q
Which types of reporting require 3rd party assurances?
A
- Assurance/ audit
- Certificate verification
- Impact analysis
- Sustainability analysis
- Use of proceeds analysis
22
Q
Which types of reporting require second-party opinions?
A
- Certificate verification
- Impact analysis
- Sustainability analysis
- Use of proceeds analysis
23
Q
Which types of reporting require approved verifiers/external reviewers (specialised providers who verify the bonds claims_?
A
- Certificate verification
- Sustainable Bond
- Sustainable bond scoring/rating
24
Q
What type of reporting is pre or post-issuance?
A
- Assurance/Audit (Optional): independent verification to provide credibility to the bond’s claims. This is optional in some cases, depending on the requirements of the bond issuer or framework.
- Certificate Verification (Mandatory): Certificate verification is mandatory for confirming that the bond meets specific standards (e.g., environmental or sustainability criteria).
- Sustainable Bond: It is usually verified by external parties to confirm that the bond aligns with sustainability criteria, but it is not necessarily always required.
- Sustainable Bond Scoring/Rating (Optional): This is an optional step where third-party entities provide a sustainability score or rating for the bond. This helps investors assess the bond’s alignment with sustainability goals but isn’t mandatory.
25
What are post-issuance/ maintenance reporting?
1. Impact Analysis (Recommended): helps assess whether the proceeds of the bond have actually contributed to the intended environmental or social impact. not always required by standards
2. Sustainability Analysis: This analysis evaluates whether the bond continues to meet its sustainability goals over time. not always required.
3. Use-of-Proceeds Analysis (Recommended): This analysis checks whether the funds raised by the bond were actually used for the designated purposes, such as green projects. isn't mandatory.
26
Describe allocation to energy among various indexes:
1. Less than 5% in s&p 500 index and MSCI ACWI index
2. Nearly 13% in Bloomberg US HY index
3. 6% of Bloomberg Global aggregate- corporate bond index
27
Where do many smaller energy and mid-stream pipeline issuers raise capital?
Debt markets
28
Why are credit ratings highly correlated compared to ESG?
1. . Credit rating agencies are fully regulated and have a prescribed and consistent methodology, unlike ESG rating providers.
2. These varying ESG rating methodologies among ESG providers lead to divergence of ESG ratings for the same issuer of a company or country.
29
How can ESG ratings be used in tandem with credit ratings?
1. provide a complementary aspect to credit ratings because the time horizon consideration is relatively short for credit ratings compared to ESG rating providers.
2. Additionally, credit rating agencies tend to put less emphasis on ESG factors in general, except perhaps for the governance factor, and more on financial sustainability.
30
Describe average correlation in pairwise common samples for ESG ratings
1. ESG: 0.54
2. E: 0.53
3. S: 0.42
4. G: 0.3
5. So G rating is less correlated than E, so less agreement amount agencies
31
What does it mean for a sovereign to be considered 'not free' and how many are there?
1. less than 43% of the 195 nations surveyed were categorized as “free”
2. nearly 29% of nations were rated “Non-Free.”
3. Non-free includes Chinese government bonds and state-owned/controlled enterprises
32
How much of Bloomberg Global Aggregate Bond Benchmark does CGB and State-owned/controlled enterprises make up and so what would happen if removed?
1. 8%
2. Likely to introduce material tracking error to portfolios
3. If debt of not free nations and related issuers are also excluded benchmark comparability erodes further
33
Describe sovereign ESG tools and use case for sovereign ESG integration
1. sovereign asset manager integrates its assessment of ESG factors into its analysis of a country’s balance sheet.
2. Unsurprisingly, governance is the most important factor when considering sovereign bonds.
3. Not only is stronger governance correlated with higher GDP per capita but it also tends to influence social and environmental factors
34
hat is the evidence that better social conditions have a positive impact on economic outcomeS?
The positive correlation (R2 of 0.68) between PISA educational standards (as measured by PISA scores) and per capita GDP is one example
35
what is correlation between higher governance standards and effective environmental policies?
A strong link (R 2 = 0.72) can be found between performance in Yale University’s Environmental Performance Index and a country’s per capita GDP
36
How are ESG factors integrated into sovereign bond investment decisions using a Financial Stability Score (FSS)?
1. ESG factors are incorporated into a country’s proprietary FSS, which ranges from +4 to –8.
2. Weaker ESG factors lower the FSS, signaling higher risk and requiring a higher yield.
3. When yields are equal, the country with a higher FSS (stronger ESG profile) is preferred by investors.
37
What are two major ESG data tools available for sovereign debt investors?
1. The World Bank’s ESG Sovereign Data Portal
2. IMF’s Climate Change Indicators Dashboard, which includes NGFS climate scenarios.
38
ow does sovereign ESG engagement differ from corporate engagement?
1. Unlike corporate engagement, sovereign engagement lacks voting rights and focuses on dialogue, such as the PRI’s pilot engagement with Australia on climate risks and opportunities.
39
What are hedge funds?
1. alternative investment vehicles that use leverage (borrowed money) to enhance returns and hedging strategies to manage net risk and produce alpha.
2. Can invest in almost anything e.g. Stocks, bonds, currencies, derivatives
3. Less regulated
4. Hedge funds are high-risk, high-reward investment vehicles for sophisticated investors that use advanced strategies to maximize returns across market conditions.
40
What are the risks of shorting?
1. If the price rises instead of falls, the investor must still buy back the shares — and losses can be unlimited if the price keeps rising.
2. Margin Requirement: Since shorting is done on margin, investors must maintain collateral and may face margin calls.
3. Borrowing Costs: Investors pay fees to borrow the stock.
41
Who are involved in working groups focused on ESG issues for hedge funds?
1. organizations representing the interests of the hedge fund community—which include the Alternative Investment Managers Association (AIMA), the Managed Funds Association, and the Standards Board for Alternative Investments, as well as the PRI
2. all convene working groups focused on ESG issues and regularly produce research, surveys, policy papers, and recommendations on practices
42
Describe the approach that a Quantitative ESG long-short equity strategy might assume:
1. As a sector-neutral portfolio, It goes long on the top ESG-rated companies (e.g., top 10% of scores) and shorts the worst-rated ones (e.g., bottom 10%).
2. It uses a number of data provider scores, including a proprietary, factor-neutral score (Man Numeric); carbon intensity metrics; and even an event-driven sentiment strategy operating on ESG news using natural language processing.
43
Why is accounting for carbon risk in derivatives and short positions challenging in net-zero strategies?
1. There's no clear standard for netting carbon risk exposures from derivatives and shorts, and investor views differ
44
How does sector and issuer variation impact net-zero portfolio construction across G7 equity benchmarks?
1. Markets like Europe lead due to lower exposure to energy/utilities, while Canada lags due to reliance on high-emission sectors like oil sands, making alignment with SBTi targets more difficult.
45
What effect does SBTi alignment have on portfolio composition and risk?
1. Lower SBTi alignment may lead to over- or underweights in sectors and issuers, altering the portfolio’s risk–reward profile compared to the broader market.
46
What is SBTi?
Science Based Targets initiative is a global organization that helps companies and financial institutions set greenhouse gas (GHG) emissions reduction targets in line with what science says is necessary to meet the goals of the Paris Agreement
47
What are the biggest challenges in ESG integration in private equity and debt?
1. Lack of public transparency
2. Lack of established reporting standards
3. Lack of regulatory oversight
4. Public market pressures surrounding ESG investment
48
What is the ESG Integrated Disclosure Project template, and how does it help private equity and debt investors?
1. Launched in November 2022, it provides a standard format for ESG-related disclosures, improving transparency and consistency for private companies and investors.
49
What challenges do private equity and debt investors face when applying ESG criteria compared to listed equities in terms of number of opportunities?
Private equity and debt investors lack the breadth and diversity of indexes and benchmarks in the listed equity space, limiting opportunities for peer comparability analysis or portfolio optimization around ESG criteria.
50
How might portfolio managers overcome the lack of ESG benchmarks in private equity and debt?
Portfolio managers may benchmark segments of the portfolio against smaller investment universes, including public companies, if data comparability exists.
51
How are limited partners (LPs) increasing expectations for general partners (GPs) in the private equity industry regarding ESG?
LPs expect GPs to integrate ESG analysis beyond just screening, requiring more robust approaches due to the nonpublic nature of the industry.
