ESG Ch. 1 INTRO

Question 1

ESG investing is an approach to managing assets where investors explicitly acknowledge the relevance of ..

Answer 1

(ESG) factors in their investment decisions, as well as their own role as owners and creditors, with the long-term return of an investment portfolio in mind.

Question 2

Name Enviromental Factors

Answer 2

These are the factors pertaining to the natural world. These include the use of, and interaction with, renewable and non-renewable resources (e.g. water, minerals, ecosystems and biodiversity). ie Climate change, water, pollution

Question 3

What are Social Factor

Answer 3

These are the factors that affect the lives of humans. The category includes the management of human resources, local communities and clients. ie human rights, slavery, work conditions

Question 4

What are Gov. Factors

Answer 4

These are the factors that involve issues inherent to the business model or common practice in an industry, as well as the interest of broader stakeholder groups. ie corruption, pay, baoard diversity

Question 5

What is CSR

Answer 5

The concept of ESG investing is closely related to the concept of investees’ corporate sustainability. Related
to this, corporate social responsibility (CSR) is a broad business concept that describes a company’s
commitment to conducting its business in an ethical way

Question 6

CSR led to the theory of

Answer 6

triple-bottom line

accounting - three Ps (People, Planet, Profit)

Question 7

Effective management of the company’s sustainability can:

Answer 7

▶ reaffirm the company’s license to operate in the eyes of governments and civil society;
▶ increase efficiency;
▶ attend to increasing regulatory requirements;
▶ reduce the probability of fines;
▶ improve employee satisfaction and productivity; and
▶ drive innovation and introduce new product lines.

Question 8

Responsible investment is a strategy and practice

Answer 8

to incorporate environmental, social and governance (ESG)
factors into investment decisions and active ownership. It considers both how ESG might influence the riskadjusted
return of an asset and the stability of an economy, as well as how investment in and engagement with
assets and investees can impact society and the environment.

Question 9

Socially responsible investment (SRI) refers to

Answer 9

approaches that apply social and environmental criteria in evaluating companies.

SRI generally score companies using a chosen set of criteria, usually in conjunction with sector-specific weightings - can be used in combination with best-in-class investment, thematic funds, high-conviction funds or quantitative investment strategies.

Question 10

Best-in-class investment involves selecting only

Answer 10

the companies that overcome a defined ranking hurdle,
established using ESG criteria within each sector or industry.  Due to its all-sector approach, best-in-class investment is commonly used in investment strategies that try to maintain certain characteristics of an index

Question 11

Sustainable investment refers to the selection

Answer 11

assets that contribute in some way to a sustainable economy, i.e. an asset that minimises natural and social resource depletion - could also mean a strategy that screens out activities

Question 12

Thematic investment refers to selecting companies

Answer 12

fall under a sustainability-related theme, such as
clean-tech, sustainable agriculture, healthcare or climate change mitigation - not all thematic are considered RI (dependant on ESG characterisitics)

Question 13

Green investment refers to allocating capital to assets that mitigate

Answer 13

▶ climate change;
▶ biodiversity loss;
▶ resource inefficiency; and
▶ other environmental challenges.

Question 14

Social investment refers to allocating capital to

Answer 14

assets that address social challenges. These can be products that address the bottom of the pyramid (BOP - thiers of social wealth) - could include immpact bonds

Question 15

Impact investing refers to investments made with the specific intent

Answer 15

of generating positive, measurable social and environmental impact alongside a financial return (coulld be below, at or above market returns) could be in EM or DM

Question 16

Ethical/value-driven and faith-based investment

Answer 16

refers to investing in line with certain
principles, usually using negative screening to avoid investing in companies whose products and services are deemed morally objectionable by the investor

Question 17

Shareholder engagement reflects

Answer 17

active ownership by investors in which the investor seeks to influence a corporation’s decisions on matters of ESG, either through dialogue with corporate officers or votes at ashareholder assembly

Question 18

Shareholder engagement efficacy usually depends on

Answer 18

▶ the scale of ownership (of the individual investor or the collective initiative);
▶ the quality of the engagement dialogue and method used; and
▶ whether divestment is known to be a possible sanction.

Question 19

One of the main reasons for ESG integration is recognising that ESG investing

Answer 19

is Finacialy material - it can reduce risk and enhance returns, as it considers additional risks and injects new and forward-looking insights into the
investment process.

Question 20

ESG integration may therefore lead to

Answer 20

A. reduced cost and increased efficiency;
B. reduced risk of fines;
C. reduced externalities; and
D. improved adaptability to sustainability megatrends.

Question 21

A. Efficiency and productivity

Answer 21

Research conducted by McKinsey found that resource efficiency can affect operating profits by
as much as 60%, and that more broadly, resource efficiency of companies across various sectors is
significantly correlated with the companies’ financial performance.

Another study showed that companies experience an average internal rate of return of 27% to 80% on their low-carbon investments.

attract and retain quality employees, and enhance
employee motivation and productivity overall. Employee satisfaction is positively correlated with
shareholder returns. ( 2.3 to 3.8%pa over peers over 25yrs)

Question 22

Look at case studies

Answer 22

DOW Chamical/GE/Walmart/Nike

Question 23

B. Reduced risk of fines and state intervention

Answer 23

typically, one-third of corporate profits are at risk
from state intervention (not only fines).

Big Pharma lowest at 25-30%, Banks and Auto the highest at 50-60%

Question 24

C. Reduced negative externalities

Answer 24

situations where the production or consumption of goods and services creates costs or benefits to others that are not reflected in the prices charged for them (ie pollution) - private cost are lower than societal costs and is the main reason gov’t intervene

Question 25

Three ways negative externalities can be managed

Answer 25

▶ market-based instruments, e.g. charges, taxes and tradable permits; ▶ regulatory instruments, e.g. vehicle emission and safety standards, traffic restrictions; or ▶ voluntary instruments, e.g. agreements with the car industry to reduce CO2 emissions from new passenger cars.

Question 26

D. Sustainability megatrends

Answer 26

recognising the economic implications of: ▶ social challenges (such as increasing income inequality, poverty, and human and labour rights abuses); and ▶ environmental issues (such as climate change, biodiversity loss and resource scarcity). ``` These factors have interacted with: ▶ the aftermath of the financial crisis; ▶ ageing populations; ▶ the rise of emerging countries; and ▶ rapid technological changes. ```

Question 27

the 4 Mega Trends

Answer 27

Emerging and urban - nearly half of the world’s large companies are expected to be headquartered in emerging markets by 2025. With Majority of GDP coming from EM Technological disruption - Accelerated adoption invites accelerated innovation - estimates that one-third of jobs will soon be replaced by smart machines and robots and Google estimates robots will attain the level of the intelligence of human by 2029 Demographic changes and wealth inequality - Today, about 60% of the world’s population lives in countries with fertility rates below the replacement rate. A smaller workforce will place a greater onus on productivity for driving growth and may cause economists to rethink the economy’s potential (support aging population, demand on resources and food) Climate change and resource scarcity - The interconnectivity between trends in climate change and resource scarcity is amplifying the impact: climate change could reduce agricultural productivity by up to a third across large parts of Africa - Globally, demand for water will increase by 40% and for energy by 50%. In short, the world’s current economic model is pushing beyond the limits of the planet’s ability to cope.

Question 28

SHORT-TERM RISK OUTLOOK

Answer 28

Ecosystem destruction, heatwaves, geo political, cyber attacks all expected to increase

Question 29

There is a growing recognition in the financial industry and in academia that ESG factors

Answer 29

influence financial performance. Meta analysis - there was a positive correlation between ESG performance and corporate financial performance, including stock prices

Question 30

Fiduciary duty

Answer 30

(PRI) on the topic have clarified that financially material ESG factors must be incorporated into investment decision-making. argue that failing to consider long-term investment value drivers – which include ESG issues – in investment practice is a failure of fiduciary duty

Question 31

Economics

Answer 31

recognition that negative megatrends will, over time, create drag on economic prosperity as basic inputs (such as water, energy and land) become increasingly scarce and expensive, and the prevalence of health and income inequalities increase instability both within countries and between

Question 32

Impact and ethics

Answer 32

positive impact see investment as a means of tackling the world’s social and environmental problems through effective deployment of capital avoiding negative impact, at times for religious reasons, usually do not invest (negative screening

Question 33

Client demand

Answer 33

calling for greater transparency about how and where their money is invested. This is driven by: ▶ growing awareness that ESG factors influence: » company value; » returns; and » reputation; and ▶ increasing focus on the environmental and social impacts of the companies they are invested in. Asset owners are instrumental representing on average around 34% of GDP in OECD countries

Question 34

Regulation

Answer 34

Regulatory change has also been driven by a realisation among national and international regulators that the financial sector can play an important role in meeting global challenges, such as climate change, modern slavery and tax avoidance. Acceleration of policy since 08

Question 35

Three ways of putting PUTTING ESG INTO PRACTICE

Answer 35

A. incorporating ESG factors into investment decision-making; B. through corporate engagement; and C. through policy engagement.

Question 36

Investment decisions

Answer 36

Asset owners can include ESG factors in their request for proposal and consider them in their appointment Asset owners and some asset managers can embed ESG into strategic asset allocation (SAA) Asset managers and asset owners who invest directly can incorporate ESG issues within their security selection process. (filter threshold, include ESG in risk analysis, use ESG criteria to identify investment op)

Question 37

Shareholder engagement

Answer 37

Investors can encourage investees to improve their ESG practices. This can happen via a company’s annual general meeting (AGM) - Engagement can also happen outside of this process

Question 38

Policy engagement as insto investor

Answer 38

Policy engagement by institutional investors is therefore a natural extension of an investor’s responsibilities and fiduciary duties to the interests of beneficiaries. Investors can work with regulators ▶ is more sound and stable; ▶ levels the playing field; and ▶ brings ESG more effectively into financial decision-making. Investors can: ▶ respond to policy consultations; ▶ participate in collective initiatives; and ▶ make recommendations to policy makers.

Question 39

What are the three United Nations (UN) initiatives

Answer 39

United Nations Global Compact United Nations Environment Programme Finance Initiative United Nations Framework Convention on Climate Change (UNFCCC) UN Sustainable Development Goals (SDGs)

Question 40

United Nations Global Compact (UNGC) was launched in 2000 | as a collaboration between leading companies and the UN.

Answer 40

These signatories agree to adhere to the ten principles, derived from broader global standards such as the Universal Declaration of Human Rights and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.

Question 41

United Nations Environment Programme Finance Initiative (UNEP FI) is a partnership between UNEP and the global financial sector to mobilise private sector finance for sustainable development.

Answer 41

UNEP FI started in 1992 with a few banking institutions and today it works with over 300 members

Question 42

United Nations Environment Programme Finance Initiative (UNEP FI) created three priciple bodies

Answer 42

▶ Principles for Responsible Investment (PRI), established in 2006 Principles for Sustainable Insurance (PSI), established in 2012 Principles for Responsible Banking (PRB) launched with more than 130 banks in 2019

Question 43

The PRI provide support in four main areas:

Answer 43

The PRI provides a broad range of tools and reports on best practices It hosts a collaborative engagement platform The PRI reviews, analyses and responds to responsible investment-related policies and consultations The PRI Academy develops, aggregates and disseminates academic studies on responsible investment-related themes.

Question 44

What are the PRI's 6 princi

Answer 44

1. We will incorporate ESG issues into decision-making processes. 2. We will be active owners and incorporate ESG issues into our ownership . 3. We will seek appropriate disclosure 4. We will promote acceptance and implementation 5. We will work together to enhance our effectiveness 6. We will each report on our activities

Question 45

The three requirements for membership to PRI

Answer 45

1. Investment policy that covers the firm’s responsible investment approach, covering >50% of assets under management (AUM). 2. Internal or external staff is responsible for implementing responsible investment policy. 3. Senior-level commitment and accountability mechanisms for responsible investment implementation.

Question 46

The The United Nations Framework Convention on Climate Change (UNFCCC), launchedUnited Nations Framework Convention on Climate Change (UNFCCC), launched...

Answer 46

Rio de Janeiro Earth Summit in 1992, | aims to stabilise greenhouse gas (GHG) emissions to limit man-made climate change.

Question 47

annual Conferences of the Parties (COP) meetings, which seek to advance members states' voluntary agreements on limiting climate change. two of importance are

Answer 47

1. The COP3 meeting in Kyoto in 1997, which created the Kyoto Protocol. This commits industrialised countries to limit and reduce their GHG emissions in accordance with agreed individual targets. 2. The COP21 meeting in Paris in 2015, which led to the Paris Agreement. This commits developed and emerging economies to strengthen the response to the threat of climate change by keeping a global temperature rise this century well below 2°C (3.6°F) above pre-industrial levels.

Question 48

The Sustainable Development Goals (SDGs), agreed by all UN members in 2015 in replacement

Answer 48

of the UN Millennial Goals, are the UN’s blueprint to address the key global challenges, including those related to poverty, inequality, climate change, environmental degradation, peace and justice

Question 49

The International Corporate Governance Network (ICGN)

Answer 49

investor-led organisation established in 1995 to | promote effective standards of corporate governance and investor stewardship to advance efficient markets

Question 50

The Global Sustainable Investment Alliance | (GSIA) is an

Answer 50

international collaboration of these membership-based (country level) sustainable investment organisations

Question 51

Core members of the GSIA includes representatives from the regional responsible investment

Answer 51

Europe, the USA, Canada, Japan, Australia and New Zealand.

Question 52

Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) takes the Paris Agreement’s 2°C (3.6°F) target and tries to

Answer 52

operationalise it for the business world - Governance, Risk management, strategy and metric targeting

Question 53

Global Impact Investing Network (GIIN) focuses on reducing barriers to impact investment by building critical infrastructure and developing activities, education and research that help accelerate adoption it...

Answer 53

▶ facilitates knowledge exchange; ▶ highlights innovative investment approaches; ▶ builds the evidence base for impact investing; and ▶ produces tools and resources.

Question 54

Name the 6 reporting initiatives

Answer 54

Global Reporting Initiative (GRI) - provide guidance on disclosure across ESG Integrated Reporting Framework (IRF) - put forward by the International Integrated Reporting Council (IIRC), encourages companies to integrate sustainability within their strategy and risk assessment by integrating it into the traditional annual report. CDP (former Carbon Disclosure Project) - non gov org to disclose and manage their environmental impact. Climate Disclosure Standards Board (CDSB) - mission to create the enabling conditions for material climate change and natural capital information to be integrated into mainstream reporting. Corporate Reporting Dialogue (CRD) - joint project with CDBS, GRI, IIRC, SASB to drive better alignment of sustainability reporting frameworks Sustainability Accounting Standards Board (SASB) - issues standards that are focused on the key material sustainability issues