Chapter 9 pt2

Question 1

What does the ICGN Model Contract Terms between Asset owners and Managers do?

Answer 1

1. Provide helpful framework and proposes best practices for ESG-aware investment mandates

Question 2

What specifically does the ICGN Model Contract Terms between Asset owners and Managers give advice on mandates about?

Answer 2

1. the monitoring and use of ESG factors,
2. the integration of ESG factors into investment decision making,
3. adherence to good practice around stewardship, and
4. voting and reporting requirements.

Question 3

What does the PRI report ‘How Asset Owners Can Drive Responsible Investment say investment mandates should require investment mangers to do>

Answer 3

1. Implement asset owners investment beliefs
   2, Integrate ESG issues into research
2. Align with asset owner time horizons and understand key risks
   4, Stewardship and engagement
   5, Engage with policy makers
3. Report on actions and outcomes achieved

Question 4

How are esg priorities built into the design of the mandate and way investment assets are selected?

Answer 4

1. excluding certain investments (e.g., the fossil fuel sector or particularly carbon-intensive aspects of it) or
2. applying a “tilt” to a broad index (so that, to pursue the climate change example, the least carbon-intensive companies are chosen in each sector meaning that the overall portfolio has a reduced intensity).

Question 5

What are the different ways managers will integrate ESG factors?

Answer 5

1. as a threshold requirement before investment can be considered,
2. as factors that inform the valuation or provide a quant basis for adjusting (or tilting) exposures,
3. as a risk assessment that offers a level of confidence in the valuation,
4. as a basis for stewardship engagement, or
5. as a combination of two or more of these methods, which is very often the case.

Question 6

What did the CFA issue in 2021?

Answer 6

1. Global ESG Disclosure Standards for Investment Products
2. First global voluntary standards for disclosing how an investment product considers ESG issues in its objectives, investment process and stewardship activities

Question 7

In addition to ESG considerations what does a client want to know about potential fund managers?

Answer 7

1. whether the approach to integration is sufficiently robust to deliver an appropriate portfolio structure,
2. that the fund manager can deliver with certainty any hard constraints on the portfolio (such as negative screens),
3. that the manager can deliver appropriately effective engagement to preserve and enhance value, and
4. that the manager delivers in practice what it sets out as its approach in these respects in its policy documents and other assertions

Question 8

What might be the ESG considerations for mandate choice, investment integration and engagement for passive/index tracking?

Answer 8

1. Mandate choice: consider the index benchmark and any ESG tilts
2. Investment integration: No or limited manger discretion in stock selection
3. Engagement: exert influence via engagement and voting, scope for influencing market-and system wide issues

Question 9

What might be the ESG considerations for mandate choice, investment integration and engagement for active equity?

Answer 9

1. Mandate choice: trustees could invest in ESG-orientated mandates e.g. sustainable equity
2. Investment integration: managers should consider financially material ESG factors and impact on future profitability in company evaluation
3. Engagement: influence via engagement and voting

Question 10

What might be the ESG considerations for mandate choice, investment integration and engagement for active fixed income?

Answer 10

1. Mandate choice: Some assets e.g. green bonds considered as part of broader mandate
2. Investment integration: consider potential ESG risks to impact credit ratings and future ability to make repayments
3. Engagement: engagement with borrowers on material ESG risks particularly at time of issuance

Question 11

What might be the ESG considerations for mandate choice, investment integration and engagement for real estate?

Answer 11

1. Mandate choice: some strategies have e/s objectives and appropriate assets may be targeted to achieve these
2. Investment integration: consider material E and S risks during acquisition and development and manage resource use during occupation
3. Engagement: engage with tenants and local community to address potential issues and drive change

Question 12

What might be the ESG considerations for mandate choice, investment integration and engagement for infrastructure?

Answer 12

1. Mandate choice: consider portfolios biased towards infrastructure that supports sustainable future
2. Investment integration: managers should asses physical and societal risk, longevity of investment means systemic issues need to be considered
3. Engagement: influence on underlying companies or asset management through governance arrangement e.g. board seats

Question 13

What might be the ESG considerations for mandate choice, investment integration and engagement for private debt?

Answer 13

1. Consider mandates that target lending at certain sustainable activities
2. Investment integration: managers should identify and seek mitigation of ESG risks during due diligence of loans
3. Engagement: ongoing dialogue with borrowers to ensure emerging and identified ESG risks are managed

Question 14

What might be the ESG considerations for mandate choice, investment integration and engagement for private equity?

Answer 14

1. Mandate choice: assess which companies the manager may target and potential for ESG exposures to arise
2. Investment integration: longevity means systemic risk need to be considered, managers should assess esg risk during due diligence and ongoing ownership
3. Engagement: expected to have high level of influence over company management and ensure governance and structures are effective

Question 15

What are the two parts of clients assessing fund managers investment decision-making process?

Answer 15

1. An analysis of the formal process and, in particular, how ESG factors are integrated - check current portfolio to see if consistent with assertions regarding ESG integration.
   2 A discussion of the process as it has been applied to individual assets, usually framed by the client identifying one or more assets that are questionable from an ESG perspective and testing how it was that the assets in question were deemed to be appropriate to be included in the portfolio

Question 16

Apart from hard cases what else will clients look at to test investment process of fund manager?

Answer 16

1. Metrics e.g. portfolio turnover, Sharpe (risk adjusted return) and other ratios
2. Might request ESG performance attribution analysis, providing insights into value added by ESG factors on stock

Question 17

What recent development facilitates assessment of portfolio as a whole?

Answer 17

1. ESG portfolio assessment tools
2. Look at ESG assessment of portfolio constituents
3. Identify outliers in the portfolio comparing them to the benchmark
4. Highly dependent on disclosures made by individual companies

Question 18

What type of portfolio is more easily resourced from a stewardship perspective?

Answer 18

1. Concentrated portfolios - take pride in being active stewards

Question 19

Why is it hard to assess engagement?

Answer 19

1. Nuanced and long-term so hard to get clear view of effectiveness
2. Visibility is low as occurs in private meetings
3. Very hard to know effectiveness - correlation between what investor sought and what happened but different to causation as board that ultimately decides

Question 20

What can clients look at to determine effectiveness of managers engagement?

Answer 20

1. Performance measurements that investors place around engagement
2. Expressed as milestones or objectives
3. Measure progress towards concrete change or better practice over the 3 or more years engagement process

Question 21

Who first made the term greenwashing?

Answer 21

1. Jay westervald 1980s

Question 22

What are the different forms that greenwashing can arise?

Answer 22

1. Deliberate intention to deceive
2. Genuine green ambition has failed to be realised
3. Simply lack of knowledge or understanding of what constitutes authentic, accurate and identifiable green credentials

Question 23

What are 3 categories of misrepresentation?

Answer 23

1. Commitments without any guarantees of action
2. Product attributes
   3. Disclosures - usually relate to social factors and related material financial risk

Question 24

Give example of when commitments haven’t followed through?

Answer 24

1. Net zero pledges made by Glasgow Financial Alliance for Net Zero (GFANZ) at the COP26 climate summit in 2021
   remain unfulfilled,
2. Relaxed its criteria, allowing weaker targets
3. International Energy Agency recommended no new fossil fuel projects but GFANZ argue could lead to disordely and unjust transition

Question 25

Give Deutsche bank example of damage of greenwashing

Answer 25

1. 2022 authorities raided Deutsche bank and its asset manager DWS 2. Accused DWS of exaggerating the sustainability of its investments 3. DWS planned to tighten controls after 4. Net profits fell by 23% that year partly due to increased legal and transformation costs 5. Fines may still be possible

Question 26

Describe research by Influence map - London based non-profit - around greenwashing

Answer 26

1. Found in 2021 that 55% of funds marketed as either low-carbon, fossil-fuel free or green energy exaggerated their environmental claims 2/ Estimated more than 70% of funds promising ESG goals fell short of targets

Question 27

What causes greenwashing in ESG reporting?

Answer 27

1. Using a single, untestable metric or label to represent sustainability performance. 2. ESG metrics vary by industry, and one metric can't capture the full picture or allow fair comparisons.

Question 28

What is essential to avoid greenwashing in ESG investing?

Answer 28

1. Transparent data 2, accurate measurement 3, performance-based scoring-not just disclosure.

Question 29

What hinders harmonisation of ESG standards?

Answer 29

1. Countries have different priorities e.g. stopping climate change vs economic growth 2. US investors focus on both social and climate issue 3. Europe more on environmental issues 4. Causes inconsistency in how ESG data are measured and reported by companies, investors, rating agencies and data providers

Question 30

What sources can support ESG verification?

Answer 30

1. Media reports 2. whistleblower alerts 3. Internal audits, 4. external review

Question 31

How can firms enhance the credibility of their ESG reporting?

Answer 31

1. By using standardized methods and independent third-party certification

Question 32

What should firms disclose about their ESG analytics?

Answer 32

1. Data sources 2. calculation methods, 3. impact assessment

Question 33

What are other risks of greenwashing?

Answer 33

1. Damaging public trust around genuine ESG-related initiatives and products 2. 67% of global consumers believe their current financial institution is guilty of greenwashing

Question 34

What is greenhushing?

Answer 34

1. To avoid greenwashing accusations, brands and businesses don't communicate as much about environmental plans 2. Caused by uncertainty over what does or doesn't qualify as green

Question 35

What is scopewashing?

Answer 35

1. Hide harmful practices behind positive ones 2. Focus too much on carbon emissions and ignore recylability or toxicity 3. e.g. manufacturing fast chargers in high emissions factory 4. Need to share direct and indirect emissions from energy transport and materials

Question 36

What is competence greenwashing?

Answer 36

1. Some boards, execs and employees use hyperbole to highlight their knowledge, skills and experience in sustainability 2. Number of CSOs tripled since 2021 3. Demand for green skills is growing, in Asia hiring for green jobs grown by 30% over 5 years 4. Proportion of execs with ESG in job title has proliferated 5. Professionals with limited experience find they are responsible for 'green funds' asset allocation

Question 37

Describe the investment time horizon, primary driver for ESG investment, risk mindset and implied favored ESG approach for Defined Benefit Pension Scheme

Answer 37

1. Investment time horizon: 10-70 years 2. Primary driver for ESG investment: Fiduciary Duty 3. Risk mindset: long-term perspective should permit higher risk tolerance 4. Implied favored ESG approach: ESG integration

Question 38

Describe the investment time horizon, primary driver for ESG investment, risk mindset and implied favored ESG approach for Defined Contribution Pension Scheme

Answer 38

1. Investment time horizon: 10-70 years 2. Primary driver for ESG investment: Fiduciary duty, personal perspectives of beneficiaries 3. Risk mindset: Greater risk aversion than time horizon might imply, if individual beneficiaries are permitted to switch providers 4. Implied favoured ESG approach: Some exclusions, esg integration

Question 39

Describe the investment time horizon, primary driver for ESG investment, risk mindset and implied favored ESG approach for general insurer

Answer 39

1. Investment time horizon: 1-2 years 2. Primary driver for ESG investment: awareness of financial impacts of climate change 3. Risk mindset: loss aversion 4. Implied favored ESG approach: ESG integration

Question 40

Describe the investment time horizon, primary driver for ESG investment, risk mindset and implied favored ESG approach for life insurer

Answer 40

1. Investment time horizon: 10-50 years 2. Primary driver for ESG investment: recognition of implications of lengthy investment time horizons 3. Risk mindset: long-term perspective typically permits higher risk tolerance 4. Implied favored ESG approach: esg integration

Question 41

Describe the investment time horizon, primary driver for ESG investment, risk mindset and implied favored ESG approach for sovereign wealth fund

Answer 41

1. Investment time horizon: 30-150+ 2. Primary driver for ESG investment: reputational risk 3. Risk mindset: high tolerance for illiquidity and short-term under-performance 4. Implied favored ESG approach: some exclusions, ESG engagement approach often most important

Question 42

Describe the investment time horizon, primary driver for ESG investment, risk mindset and implied favoured ESG approach for foundation

Answer 42

1. Investment time horizon: 50-250+ years 2. Primary driver for ESG investment: reputational risk, investment consistent with founding or charitable arms 3. Risk mindset: high tolerance for illiquidity and short-term under-performance 4. Implied favored ESG approach: Exclusions likely, to ensure investment is consistent with founding or charitable aims

Question 43

Describe the investment time horizon, primary driver for ESG investment, risk mindset and implied favored ESG approach for individual investor

Answer 43

1. Investment time horizon: 1-50 years 2. Primary driver for ESG investment: personal ethics and perspectives 3. Risk mindset: loss aversion 4. Implied favored ESG approach: screen funds, strong ESG integration

Question 44

What happens if specific ESG requirements are not in the mandate?

Answer 44

1. Included in a side letter which also has contractual obligations 2. Insight into model by Brunel Asset Management Accord

Question 45

What does the Brunel Asset Management Accord set out?

Answer 45

1. The side letter will have a pension manager's approach to long-term investment and ESG factors 2. In language that is less suited to the hard legal language of a specific contract but more to a softer form of agreement 3. Fund managers are enabled to more clearly understand the client's perspective and thus align to it

Question 46

Why are time horizons important?

Answer 46

1. For most asset owners longer than for fund managers 2. For long-term portfolios, factors and risks which matter to asset owners are different from those considered within fund management process 3. Asset owners are keen to see more effective integration of these longer-term factors into investment processes

Question 47

How can a carbon-tilted bond fund benefit from broader investor engagement efforts?

Answer 47

1. While the fund may have direct stewardship over its fixed-income investments, it can also benefit from the investor’s broader engagement—such as equity engagement—which may lead to positive changes in companies that the bond fund also holds.

Question 48

Why is liquidity an issue for impact investing?

Answer 48

These investments often lock up money for long periods, making it difficult for institutional or retail investors to exit when liquidity is needed.