Introduction Flashcards
(110 cards)
1
Q
What is sustainable investing
A
It is an investment approach that considers environmental, social and governance (ESG) factors in addition to traditional financial analysis
2
Q
why is ESG investing becoming more mainstream
A
due to social, regulatory and client pressure, influence from responsible investment initiatives like the PRI, and growing evidence of financial benefits from ESG integration
3
Q
what is the Principles for Responsbile Investment (PRI)
A
PRI is a leading proponent of responsible investment that encourages the incorporation of ESG factors into investment decision-making
4
Q
How do ESG factors relate to broader sustainability goals
A
ESG investing is part of the broader context of sustainability, supporting efforts to address global environmental and social challenges
5
Q
what are the key drivers for integrating ESG into investment practices
A
societal expectations, regulatory developments, client demand, and evidence of ESG’s impact on financial performance
6
Q
what is ESG investing
A
ESG investing is an approach to managing assets in which investors explicitly incorporate environmental, social, and governance (ESG) factors into investment decisions, focusing on long-term risk-adjusted returns
7
Q
how does ESG investing differ from other responsible investment approaches
A
ESG investing focuses on ESG factors’ impact on long-term returns, whereas other responsible investment approaches may also include non-financial value creation and reflect stakeholder values
8
Q
what is the definition of responsible investment
A
responsible investment is an umbrella term for investment approaches that consider ESG factors in security selection and portfolio construction
9
Q
why is there no universal standard for ESG factors
A
because ESG definitions and the importance of different factors vary depending on the framework and stakeholders involved; some topics overlap between E, S and G
10
Q
give examples of Environmental ESG issues
A
climate change, resource depletion, waste, pollution and deforestation
11
Q
give examples of Social ESG issues
A
human rights, modern slavery, health and safety, working conditions, and employee relations
12
Q
give examples of Governance ESG issues
A
Bribery and corruption, executive pay, board diversity and structure, lobbying and tax strategy
13
Q
what is long-termism in ESG investing
A
long-termism emphasises sustainable value creation and investment strategies focused on long-term outcomes rather than short-term financial gains
14
Q
what are 2 relevant forms of short-termism in investing
A
- Trading based on anticipated short-term price movements
- Prioritising near-term financial results in engagements with investee companies
15
Q
what are the risks of short-termism in investing
A
it can discourage long-term projects like R&D, promote bubbles, lead to financial instability and ignore long-term ESG risks
16
Q
what is the Shareholder Rights Directive (SRD)
A
a 2020 EU regulatory initiative requiring investors to be active owners and adopt a long-term investment focus
17
Q
what do environmental ESG factors pertain to
A
the natural world, including use and interaction with resources like water, minerals, ecosystems, and biodiversity
18
Q
what do social ESG factors involve
A
human well-being, including management of human capital, communities, clients, and even non-human animals
19
Q
what do governance ESG factors concern
A
issues related to country laws, industry practices, and the interests of broader stakeholder groups
20
Q
what is the main difference between engagement and other responsible investment approaches
A
engagement focuses on influencing issuer behavior, while other approaches relate to portfolio construction and which securities are held
21
Q
what is responsible investment according to the PRI (2020)
A
a strategy and practice to incorporate ESG factors into investment decisions and active ownership
22
Q
what is Socially Responsible Investment (SRI)
A
an approach that applies social and environmental criteria in evaluating companies, usually through scoring and screening
23
Q
what is best-in-class (positive screening) investment
A
selecting companies with top ESG scores within their sector or industry, often used to maintain index-like characteristics
24
Q
define sustainable investment
A
selection of assets contributing to a sustainable economy by minimising environmental and social resource depletion, often involving ESG integration or positive impact
25
what is thematic investing in an ESG context
investing in themes addressing environmental or social challenges, such as clean energy, water efficiency, or affordable healthcare
26
what is green investment
capital allocation to assets that address environmental challenges like climate change and biodiversity loss (e.g. green bonds, recycling, smart grids
27
What is social investment
investing in solutions to social challenges, often for low-income populations (e.g microfinance, clean energy access), sometimes via social impact bonds
28
what is impact investing
investing with the intent to generate positive, measurable social or environmental impact alongside financial returns, often linked to the UN SDGs
29
What differentiates impact investing from philanthropy
impact investing seeks both social/ environmental impact and financial return, while philanthropy does not expect financial returns
30
what is ethical or faith-based investing
investment aligned with moral or religious principles, often involving negative screening of "sin stocks" (e.g. tobacco, alcohol, weapons)
31
give an example of Christian faith-based investment exclusions
avoid firms involved in abortion, contraceptives, weapons; favour those supporting human rights and labour unions
32
give an example of Shari'a-compliant investment restrictions
Avoid companies profiting from alcohol, pornography, gambling, interest, or pork-related products
33
what is shareholder engagement
active ownership where investors influence corporate ESG behaviour through dialogue or voting; effectiveness depends on ownership scale and communication quality
34
what is corporate social responsibility (CSR)
a business's ethical commitment to social and environmental concerns, often through strategies behaviours rather than just philanthropy
35
what are some benefits of effective corporate sustainability management
license to operate, efficiency gains, regulatory compliance, fewer fines, better employee satisfaction, and innovation
36
How does ESG investing relate to CSR and sustainability
ESG investing aims to incorporate the strategic benefits of CSR and sustainability into investment analysis and portfolio construction
37
what are the six main perspectives in the macro-level ESG debate
risk, fiduciary duty, economics, impact and ethics, client demand, and regulation
38
according to the World Economic Forum's 2024 report, what risks now top the global agenda
environmental risks, especially climate change, have surpassed traditional economic risks
39
what did Mark Carney mean by climate change being "the tragedy of the horizon"
the severe impacts of climate change fall beyond the typical decision-making timelines of financial actors, making them hard to address proactively
40
what was a key takeaway from the PG&E case
climate-driven hazards like wildfires can lead to major financial losses and even bankruptcy, as seen with PG&E's liabilities
41
What is a stranded asset
an asset that becomes obsolete or non-performing due to regulatory, environmental or market shifts
42
Why is materiality a challenge in ESG investing
ESG relevance varies across sectors, companies, growth stages, and geographic locations, making standardisation difficult
43
what did the Freshfields (2005) report argue about ESG and fiduciary duty
Integrating ESG factors to better predict financial performance is not only permissible not arguably required by fiduciary duty
44
what does the PRI (2019) report say modern fiduciary duty includes
incorporating financially material ESG factors, respecting sustainability preferences, active ownership, supporting financial system stability, and transparent disclosure
45
What is the economic argument for ESG investing
ESG megatrends like climate change and inequality threaten economic prosperity and long-term market returns, especially for universal owners
46
what is the rationale behind the impact and ethics perspective
investors may seek to create positive change or avoid harm, aligning their capital with moral or religious values
47
what does negative screening involve
avoiding investments in sectors or companies deemed harmful or unethical, like tobacco, fossil fuels, or those violating human rights
48
what drivers ESG interest from the client demand perspective
growing awareness of ESG's impact on company value, returns, and reputation, and a desire for investment transparency and responsibility
49
what is the Net-Zero Asset Owner Alliance
a coalition of asset owners committed to transitioning their portfolios to net-zero GHG emissions by 2050
50
how has regulation influenced ESG investing
regulatory interventions have surged post-2008, with over 730 global policy changes encouraging or requiring ESG consideration
51
what is the difference between hard law and soft law in ESG regulation
hard law is legally binding; soft law is not but can influence behaviour and evolve into binding regulation over time
52
what is the main reason for ESG integration in investment processes
to reduce risk or enhance returns by considering additional forward-looking factors that influence financial performance
53
what are 4 potential outcomes of ESG integration
1. Reduced cost and increased efficiency
2. Reduced risk of fines/ state intervention
3. Reduced negative externalities
4. Improved ability to benefit from sustainability megatrends
54
how can ESG improve operational efficiency
through resource conservation, cost reduction, and enhanced employee productivity and motivation
55
how is ESG integration linked to employee satisfaction and returns
companies with high employee satisfaction tend to outperform peers in stock returns by 2.3%- 3.8% annually over long periods
56
what is the estimated share of EBITDA at stake from regulatory intervention in some sectors
up to 60% in sectors like automotive and technology due to government subsidies, emissions regulation, and pricing controls
57
give examples of major ESG-related corporate fines
BP ($65B for oil spill), Bank of America ($16.65B for subprime crisis), Volkswagen ($14.7B for emissions cheating)
58
what is a negative externality in ESG
a cost imposed on others by a firm's activities that is not reflected in the price of its products (e.g. pollution, poor labour practices)
59
what does internalisation of externalities mean
adjusting market prices or regulations to ensure companies bear the full cost of their social and environmental impacts
60
what was the EU's response to aviation emissions
the EU included aviation in its Emissions Trading System (ETS) and several countries imposed aviation carbon taxes or replaced flights with trains
61
what are sustainability megatrends
large-scale social and environmental trends impacting long-term growth and profitability — e.g. climate change, tech innovation, inequality
62
what are 3 widely recognised global megatrends
1. Technological innovation
2. Demographic changes and wealth inequality
3. Climate change and resource scarcity
63
what is dynamic materiality
The idea that financial materiality evolves over time, and what is non-material today may become material in the future
64
what is double materiality
the concept that companies must consider both how ESG issues impact them and how they impact society and the environment
65
according to a study of 15000 companies, what percent of profits would be lost if they had to pay for carbon damage
about 44%
66
what are 3 common challenges before implementing ESG investing
1. Perceived negative impact on returns due to reduced universe
2. Misinterpretation of fiduciary duty
3. Unsupportive advice from consultants and advisers
67
what are 3 common challenges after deciding to implement ESG investing
1. unclear investment mandate or asset owner expectations
2. Lack of ESG resources (data, tools, expertise)
3. Gaps between ESG marketing, commitments, and fund delivery
68
why do some investors still question ESG's value despite supporting evidence
because investment professionals often rely more on personal experience than third-party research
69
how can fiduciary duty be misunderstood as a barrier to ESG investing
some believe ESG integration conflicts with maximising financial returns, even though modern interpretations support ESG consideration as part of fiduciary duty
70
why are portfolio "tilts" a concern for some institutional investors
because they may cause tracking error versus benchmarks, which conflicts with perceived duties to minimise active risk
71
how can asset owners influence ESG product offerings from fund managers
by clearly signaling ESG expectations and using model mandates or toolkits developed by initiatives like PRI, ICGN, and University of Cambridge
72
what are key resource challenges for ESG integration
funding constraints, lack of ESG-specific expertise, and high costs of research, data, monitoring, and reporting
73
what is a key data challenge in ESG investing
ESG data quality and standardisation are poor, especially outside listed equities, and disclosures vary widely by company and sector
74
why is ESG often treated as a qualitative input in investment analysis
because ESG metrics are hard to quantify, often less respected than financial metrics, and integration into valuation models remain difficult
75
what is greenwashing in ESG investing
misleading claims about the ESG characteristics of funds, companies, or products, including false environmental, social, or governance practices
76
how is the EU addressing greenwashing
by launching initiatives to standardise ESG fund and index claims to improve transparency and credibility
77
What is the general academic consensus on ESG factors and corporate financial performance (CFP)
the majority of academic studies show a positive relationship between ESG performance and CFP, with only about 10% reporting a negative relationship
78
what is a key finding from the 2012 Deutsche Bank meta-study
89% of studies showed companies highly rated for ESG outperformance the market; 85% showed better business performance ESG fund performance was less consistent
79
what were the 2014 University of Oxford and Arabesque study findings
- 90% found good ESG lowers cost of capital
- 88% found it improves operational performance
- 80% found positive stock price correlation
80
what did the 2015 Friede, Busch, and Bassen meta-study conclude
about 90% of 2200 studies found a positive or neutral relationship between ESG factors and financial performance across asset classes
81
what were the limitations found in studies on ESG and investment fund performance
only 15% of portfolio-level studies were positive; 11% were negative. Reasons include factor noise, differing ESG approaches, and implementation costs
82
what did the 2021 NYU Stern and Rockefeller Asset Management study find about corporate financial performance and ESG
- 58% of corporate studies showed positive ESG-financial performance correlation
- 13% were neutral, 21% mixed, and 8% negative
83
what did the same 2021 study find about ESG and investment performance (e.g. alpha)
- 59% of studies showed similar or better performance vs conventional approaches
- only 14% showed negative results
84
what did the 2021 study find regarding climate/ low-carbon ESG studies
- 57% of corporate studies had positive financial outcomes
- 65% of investor studies showed positive or neutral performance
- only 6-13% showed negative results
85
what overall conclusion can be drawn about ESG's financial materiality
ESG factors are generally financially material and can enhance corporate and investment performance, especially over the medium to long term
86
what are the 3 primary ways investors reflect ESG considerations in their investment process
1. Incorporating ESG into investment decision-making
2. Corporate engagement
3. Policy engagement
87
how do asset owners incorporate ESG into investment decisions
through RFPs, manager selection, integrating ESG into mandates, and monitoring ESG implementation
88
what is strategic asset allocation (SAA) and how does it relate to ESG
SAA is the allocation of capital across asset classes, sectors, and regions; ESG can be integrated at this strategic level by both asset owners and managers
89
What are 3 ways ESG factors can be applied in security selection and portfolio management
1. ESG ratings to filter investments
2. Integrating ESG into financial/ risk analysis
3. Thematic investing (e.g. water funds, impact investing)
90
what is shareholder engagement in ESG investing
investors actively engage with companies to influence ESG practices, including voting at AGMs or discussing issues with company leadership
91
what is policy engagement in ESG investing
investors work with regulators and standard setters to influence financial system rules to support sustainability and ESG integration
92
why is policy engagement considered part of investor's fiduciary duty
because sound public policy helps protect beneficiaries' long-term interests by promoting market stability and sustainable returns
93
what are 3 methods investors use for policy engagement
1. responding to policy consultations
2. Participating in collective initiatives
3. Recommending improvements to policymakers
94
What is the United Nations Global Compact (UNGC)
a corporate sustainability initiative launched in 2000 with 10 principles covering human rights, labour, environment, and anti-corruption
95
what is UNEP FI
a partnership between the UN Environment Programme and the financial sector to promote sustainable finance, leading initiatives like the PRI, PSI, and PRB
96
what are the 3 principles frameworks developed or supported by UNEP FI
1. Principles for Responsible Investment (PRI)
2. Principles for Sustainable Insurance (PSI)
3. Principles for Responsible Banking (PRB)
97
what are the 6 Principles for Responsible Investment (PRI)
1. Incorporate ESG into analysis and decisions
2. Be active owners
3. Seek ESG disclosure
4. Promote the PRI
5. Work together
6. Report progress
98
what are the minimum requirements for PRI signatories since 2018
1. ESG policy covering > 50% AUM
2. Staff responsibility for ESG implementation
3. Senior-level ESG accountability
99
what is the UNFCCC and what are two key COP agreements
the UN Framework Convention on Climate Change aims to limit GHGs. Key COPs:
1. Kyoto Protocol (COP3, 1997)
2. Paris Agreement (COP21, 2015)
100
what are the UN Sustainable Development Goals (SDGs)
a set of 17 goals adopted in 2015 to address global issues like poverty, inequality, and climate change; used by some investors to guide impact reporting
101
what is GFANZ
the Glasgow Financial Alliance for Net Zero is a coalition of financial institutions committed to net-zero emissions by 2050, launched at COP26
102
what is the Global Reporting Initiative (GRI)
a broad stakeholder-focused framework for environmental, social, and economic disclosures, used widely and aligned with the UNGC
103
what is the ISSB and what does it aim to do
the International Sustainability Standards Board creates global sustainability disclosure standards for capital markets. Effective from Jan 2024
104
What happened to the TCFD in 2024
its responsibilities were absorbed by the ISSB, and its framework was integrated into ISSB standards (IFRS S1 & S2)
105
what were the four disclosure areas of the TCFD
1. Governance
2. Strategy
3. Risk Management
4. Metrics and Targets
106
what is the Asia Investor Group on Climate Change (AIGCC)
a platform for Asia's investors to collaborate on low-carbon investing, engagement, and ESG best practices
107
what does the Global Impact Investing Network (GIIN) do
builds infrastructure for impact investing, develops tools like IRIS+ and ImpactBase, and supports research and innovation
108
what is the Global Sustainable Investment Alliance (GSIA)
a network of regional sustainable investment organisations promoting ESG investing globally
109
what is the International Corporate Governance Network (ICGN)
an investor-led group that promotes corporate governance standards and publishes stewardship and mandate guidance
110
what are the CFA Institute Global ESG Disclosure Standards for Investment Products
voluntary global standards for disclosing how ESG factors are considered in investment products' objectives, processes, and stewardship
