Chapter 9 Flashcards
(62 cards)
1
Q
What are RFPs?
A
- Requests for proposals
- Evaluation docs for consultants and asset allocators to conduct initial due diligence on prospective asset managers
- Important for identifying potential providers of fund management services
2
Q
How did John Bogle describe our society?
A
- Double-agency
- Corporate agents (CEOs) who are duty bound to represent their shareholders vs money manager/agents who are duty-bound to represent their mutual fund shareholders and other clients
3
Q
How can investment chains agency problems be addressed?
A
- Careful alignment and accountability
- Similar to corporate governance agency problem
4
Q
How should alignment be designed?
A
- So the timeframes and structures of portfolio manager assessment and remuneration closely reflect both the performance experienced by the clients they serve
- and the time frames over which they need performance to be delivered.
5
Q
What does accountability require?
A
- portfolio managers respond to the clearly expressed intentions of their clients and report as fully as required.
6
Q
What can deliver alignment and accountability?
A
Client mandates if designed well
7
Q
What are the steps in designing mandates?
A
- Clarifying Client Needs: Defining the ESG Investment Strategy
- Fully Aligning Investment with Client ESG Beliefs
- Developing Client-Relevant ESG-Aware Investment Mandates
- Tailoring ESG Investment Approach to Client Expectations
- Holding Managers to Account
8
Q
Describe the first step of mandate design: Clarifying Client Needs: Defining the ESG Investment Strategy
A
- clients should be clear about their needs and set them out in a clear statement of ESG investment beliefs
- requires them to define their investment goals and beliefs.
- Institutional clients will typically be keenly aware of the goals that they are trying to achieve (their risk-adjusted return target over the appropriate time horizon) but may find it harder to define their investment beliefs.
- The investment beliefs—which might be expressed in a statement of investment principles—ought to guide the overall approach toward ESG investment (and investment more generally) and will help frame any mandate agreed with an investment manager.
9
Q
Describe the second step of mandate design: Fully Aligning Investment with Client ESG Belief
A
- Require a clear framing of basic expectations:
a. sustainability approaches,
b. guidelines,
c. clarifying to the client the implications of these on the investment universe and risk–return characteristics. - PRI suggests asset owners should ensure that mandates align across asset classes with their beliefs and strategies
10
Q
What needs to be addressed in second step of mandate design
A
- aligning timeframes through fees and pay structures
- ensuring that ESG issues are fully integrated into investment decision-making
- ensuring that the investment manager engages with companies and issuers, and votes shareholdings
11
Q
Describe step 3 of mandate design: Developing Client-Relevant ESG-Aware Investment Mandates
A
- Ensuring that the mandate is fully operational is typically done through a detailed RFP process and subsequent investment management agreement (IMA) discussions.
- questionnaire sent to a long list of potential managers.
- For those asset owners with a more focused approach to ESG investing, the questions will be detailed and challenging and form a significant element of the RFP decision-making process.
- Asset owners use to sift providers and develop shortlist of potential managers
- Then beauty parade series of meetings between appropriate representatives of the asset owner and potential fund managers
12
Q
Describe step 4 of mandate design: Tailoring ESG Investment Approach to Client Expectations
A
- fund manager ensures that the investment approach is aligned to client beliefs and expectations.
- This may be done outside the legal mandate as well as within it.
13
Q
Describe step 5 of mandate design: Holding managers to account
A
- Once the mandate is agreed upon, the client will wish to ensure that the fund manager is indeed delivering in accordance with the mandate.
- focus should not be limited to assessing delivery of financial performance in line with expectations
- equal attention should be paid to reasons behind both striking outperformance and notable underperformance versus expectations.
- Additionally, for ESG mandates in particular, the assessment is likely to be across a broader range of issues, including financial performance.
14
Q
What are the two forms that ‘holding managers to account’ work will take:
A
- monitoring meetings between the client and the fund manager and
- the manager’s measurement and reporting of its ESG performance.
15
Q
What did the UK pensions and lifetime savings association (PLSA) produce for its members?
A
- A stewardship checklist which encourages the development of a broader philosophical approach
- Has 3 key requirements to ensure effective and meaningful stewardship strategy
16
Q
What are the 3 key requirements in the PLSA Stewardship checklist?
A
- Be clear about how stewardship fits in their investment strategy and policy and how it helps meet their investment objectives.
- Seek to ensure that fund managers and other service providers deliver effective integration of long-term ESG factors into their investment approach.
- Work with their advisers to consider the level of resources available for stewardship activities, which assets are covered, and what the appropriate structure is.
17
Q
What should ‘Be clear about how stewardship fits in their investment strategy and policy and how it helps meet their investment objectives’ include?
A
- a clear and agreed understanding of the trustee board and relevant organizations’ (e.g., the employer’s) overall mission, purpose, and objectives;
- a defined set of agreed investment beliefs—including on ESG issues—at a level that ensures everyone is comfortable but that is also sufficiently granular to meaningfully inform and guide the investment strategy and objectives;
- Establish a robust framework to decide and monitor investment policies, including how stewardship supports those policies.
- a strategy for how stewardship fits into the manager selection process and ongoing relationship monitoring
18
Q
Describe different level of resources available for stewardship activities:
A
- Some schemes will have the resources for an in-house stewardship team.
- Others will need to outsource stewardship to either their existing asset manager or a specialist stewardship “overlay” provider.
- Note that delegating stewardship activities does not absolve schemes of responsibility.
- Instead, they should take ownership of the stewardship approach and ensure they have a clear understanding of work carried out on their behalf.
19
Q
What regulation came into UK in 2019 involving pension schemes?
A
- required pension schemes to set out in their statement of investment principles (SIP) their policies on how they consider financially material ESG factors in their investment approach
- and as the extent to which they undertake stewardship, including engagement and voting.
- Similar requirements in line with EU’s shareholder rights directive II
20
Q
What are 4 main aims of Australia global asset woners?
A
- We aim to enhance member returns.
- We believe in active management—both asset allocation and stock selection.
- We use our scale to reduce costs and better structure investments.
- We’re aware of our responsibility to the broader community, consistent with our obligations to maximise benefits to members.”
21
Q
How do an asset owner’s purpose and investment beliefs shape ESG integration into mandates?
A
They influence whether ESG is viewed as primarily a risk factor or a value creator, which then shapes expectations of fund managers and how ESG is embedded in mandates.
22
Q
What are the two key building blocks of a sustainable investment strategy, according to Bernow, Klempner, and Magnin (2017)?
A
- A balance between risk and return
- A thesis about which factors strongly influence corporate financial performance.
23
Q
What are the first two fundamental questions asset owners should ask when developing their ESG philosophy?
A
- Are ESG factors more important for risk management or value creation?”
- What ESG factors are material?”
24
Q
What are the 2 key questions that frame how the beliefs are translated into the specifics of the mandates
A
- Is ESG a risk management tool or a source of investment advantage?
- Which aspects of ESG most matter from the perspective of the asset owner?
25
What will the 2 key questions also help to shape?
1. Strategic asset allocation of asset owner- long-term exposures that it chooses to have in terms of asset classes and geographies
2. Decisions around the asset owner's tactical asset allocation (TAA) or short-term variations around the SAA to respond to the nearer-market and other circumstances
26
What might a pension fund that is concerned bout climate change do with mandate?
1. The fund might establish multiple mandates investing in new technologies, including renewable energy generation.
2. The fund’s mainstream equity and debt mandates may well include screens that exclude fossil fuel investments.
3. The fund may require that any sovereign bond mandate include an active ESG overlay that seeks to limit exposure in countries where the physical impacts of climate change are likely to be most acute.
4. The fund may have decarbonization targets for the mandates that may have an impact on sector allocation and security selection.
27
What might a foundation investment portfolio concerned about human rights abuses be more likely to have in the mandate?
1. apply a screening approach across portfolios requiring the exclusion of any investment facing significant allegations and
2. screen out exposures to certain countries where human rights abuses are perceived to be a frequent occurrence or where human rights standards are deteriorating at a rapid rate.
28
What are two dimensions of investing that apply to sustainable investing practices
1. Investment mandate
2. Investment beliefs and strategy
29
What elements are included in the investment mandate dimension of sustainable investing?
1. Consideration of ESG factors, including prioritization
2. Targets
30
What elements are included in the investment beliefs and strategy dimension of sustainable investing?
1. Rationale for ESG integration
2. Material ESG factors
31
What are investment operation enablers?
1. Tools and processes - screening and active engagement
2. Resources and organisation - ESG expertise, integration with investment teams, collabs
3. Performance management- review of external managers, follow-up on internal managers
4. Public reporting - accountability and transparency
32
What are some inherent challenges that investment strategies face?
1. the lack of ESG data within their scope or
2. a relative scarcity of methodologies and best practices to apply ESG integration in an asset class.
33
What ideas should someone follwo to choose competence over greenwashing?
1. Create awareness in entire organisation
2. If large org, build team with genuine ESG experts, need people with non-financial subject matter expertise and material ESG expertise
3. Don't hire based on ESG self-labelign or ESG-related certificate acronyms on CV
4. Build diverse team
5. If small org then try collaborating with research sector
34
How many environmental claims did EU Comission find were vague, misleading or unfounded?
1. 53%
35
How many green claims were completely unsubstantiated?
1. 40%
36
How many sustainability labels and green energy labels in the EU were found?
1
1. 230 sustainability
2. 100 green energy - half had weak or non-existent verification
37
What did European commision find when doing an annual sweep of websites to screen for potential breaches?
1. 344 claims online
2. Almost half of claims were false or deceptive
3. 42% could amount to greenwashing
4. 57.5% the trader didn't provide enough info to assess accuracy
38
Which European orgs set out a number of core greenwashing characteristics?
1. The European Supervisory Agencies (ESAs) consisting of
2. the European Banking Authority (EBA)
3. the European Insurance and Occupational Pensions Authority (EIOPA)
4. the European Securities and Markets Authority (ESMA)
39
What were the core greenwashing characteristics the ESA presented?
1. Misleading claims due to
a. omission of info that consumers or investors would need to take an informed transactional or investment decision
b. Actual provision of info relevant that is false or deceives consumers or investors
2. Can occur at entity level (strategy or performance), product level (products characteristics or performance) or service level (provision of financial advice)
3. Intentional or unintentional
4. At any point where statements are made including different stages of cycle of financial products or services (delivery, marketing sales) or of investment value chain (issuer, investment firms)
5. May occur in specific disclosures required by Eu sustainable finance reg framework (SFDR) or as a result of non-compliance with general principles (provide info which is fair clear and not misleading)
6. Triggered by entity to which comms relate, entity responsible for product, or 3rd parties (ESG rating providers)
40
What are 3 pieces of regulation in EU to combat greenwashing claims?
1. Green Claims Directive (GCD)
2. The Eu Ecolabel
3. Stricter Rules on Ecolabeling
41
What is the aims of the GCD?
1. 2023
2. Aims to make green claims reliable, comparable and verifiable across the EU
3. Protect consumers from greenwashing
4. Contribute to creating a circular and green EU economy by allowing consumer to make informed decisions
5. Establish a level playing field when it comes to environmental impacts, aspects or performance of products or trader
42
What does the GCD do?
1. Provides min requirements for valid, comparable and verifiable info about environmental impacts of products that make green claims
2. Evidence must be credible and supported by science, take into account international standards
3. Require verification by independent auditors before made and marketed
4. Proposes to strengthen control and certification by independent verifiers
43
What level will enforcement of GCD take place and what will be penalties?
1. Member state level
2. Range from imposed fines which deprive companies of the benefits of infringements to confiscation revenues and temporary exclusion from public procurement processes for up to 12 months and public funding
44
What is the EU Ecolabel?
1. 1992
2. Official Eu voluntary label of environmental excellence
3. Exempt from GCD as already adheres to 3rd party verification standard
45
What is Stricter Rules on Ecolabelling?
1. New public labelling schemes will not be allowed after GCD kicks in except under EU law
2. If member state required new certification, can go to EU to develop it
3. New private ones allowed but only if added value can be demonstrated to national authorities in charge of approving
4. Public and private schemes from developing markets will need to be submitted for approval procedure before being admitted to EU market
5. Labels with aggregated scores won't be allowed
46
What are different regulations/frameworks in UK?
1. Green Claims Code
2. FCA
47
What is Uk's green cliams code?
1. Competition and Markets Authority published in 2021
2. List of 6 principles designed to prevent businesses from making misleading claims about products and services
3. Only covers issues including inaccurate claims, overstated claims and claims that don't enable fair comparisons
4. To investigate compliance, CMA first need to issue letter of consultation
5. Once responds, CMA announces investigation publicly
6. Has power to order the business to make recommended changes to its messaging on voluntary basis
7. If don't, CMA can begin litigation
8. CMA unable to fine companies for greenwashing
48
What are the 6 principles that claims must be according to Green Claims Code?
1. be truthful and accurate;
2. be clear and unambiguous;
3. not omit or hide important/relevant information;
4. be fair and meaningful, if they include comparisons;
5. consider the full life cycle; and
6. be substantiated.
49
What are the FCA's greenwashing measures?
1. 2023, introduce anti-greenwashing rule that applies to all firms
2. Use of ESG-related terminology like green will be limited to ensure alignment with proposed sustainable strategies and objectives
3. Proposes to introduce sustainable investment product labels that give consumers confidence to choose right product for them
4. Any serious offences of greenwashing would be breaches of the Consumer Protection from Unfair Trading Regulations 2008. Under proposed laws, the CMA will be able to impose civil monetary penalties for breaches of “core” consumer laws.
50
What is the IOSCO?
International Organization of Securities Commissions
51
What were the 2 reports published by the IOSCO?
1. “Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management: Final Report”
2. “Environmental, Social and Governance (ESG) Ratings and Data Products Providers: Final Report”
52
What was in “Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management: Final Report”
1. Series of recs for asset managers covering reg and supervisory expectations for asset managers
2. Related disclosure both at firm and product levels
3. Terminology
4. Financial and investor education
53
What was in “Environmental, Social and Governance (ESG) Ratings and Data Products Providers: Final Report”
y
1. Explores developments and challneges related to use of ESG ratings and data products
2. Recommends regulators focus attention on ESG ratings and data providers in their jurisdication and consider if sufficient oversight
3. Set of specifc recs about type of issues that ESG ratings and data providers could both consider in developing reg frameworks and internal processes
4. Focus on governance and processes, call for transparency
54
What has France done to combat greenwashing?
1. France introduced laws in January 2023 requiring firms claiming a product is carbon-neutral to report on all the greenhouse emissions of that product for its entire life cycle.
55
What has US done in greenwashing regs?
1. Securities and Exchange Commission (SEC) issued the proposed Names Rule and ESG Disclosure Rule targeting greenwashing in the naming and purpose of claimed ESG funds.
2. The proposed rule covers regulating ESG-related practices of registered investment companies, business development companies, and private funds managed by registered investment advisers
3. The Corporate Climate Disclosure regulations, which require disclosure of GHG emissions and related calculations and estimations in ESG statements.
56
How are funds and advisers categorized under the SEC’s proposed ESG rule for disclosure purposes?
1. Into three tiers based on ESG relevance:
a. ESG is integrated into the overall strategy
b. ESG is a focused part of the strategy
c. ESG is the primary objective of the strategy
57
What had Japan done to combat greenwashing?
1. 2023, the Financial Services Agency (FSA) of Japan proposed new guidelines that define the scope of ESG Public Funds subject to the guidelines.
2. The guidelines also address checkpoints for disclosures and management of ESG Public Funds, when Investment Trust Managers (ITMs) registered under the Financial Instruments and Exchange Act of Japan create Funds as ESG Public Funds
58
Describe fast fashion controversy
1. Fashion contributes to 5% of global emissions
2. Fast fashion encourages repeated turnover of synthetic fibres and petroleum-based products that end up in landfills or incinerators
3. Many called out for misleading statements e.g. Made with cotton if only made with 70%
59
Describe RBC Global Asset Management ESG philosophy:
1. Investing in sustainable, high-quality companies at attractive valuations with long-term stewardship.
2. Combines ESG and financial analysis to assess long-term value
3. Treated as non-traditional but essential source of risk and opportunity
4. integrated directly into company assessments rather than screen or overlay
5. Recognises industry to industry variation in relevance
60
Describe Generation Investment Management ESG philosophy:
1. Construct portfolios of sustainable companies with confidence from deep research and analysis
2. A sustainable company is:
a. one whose current earnings do not borrow from its future earnings;
b. one whose sustainability practices drive performance and competitive positioning;
c. one that provides goods and services consistent with a net-zero, prosperous, equitable, healthy and safe society
61
What does an ESG policy need ensure a portfolio manager does...?
1. addresses ESG issues at portfolio reviews,
2. establishes the rationale and methodology for ESG portfolio-level assessment,
3. assesses exposure to ESG risk within the risk management function,
4. estimates ESG impacts to the portfolio,
5. responds in the investment decision-making process to ESG implications,
6. discloses ESG exposure to the fund's investors.
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