Long Term Value Creation

Question 1

market framework used in traditional investing

Answer 1

efficient markets hypothesis

Question 2

market framework used in long term value creation

Answer 2

adaptive market hypothesis

Question 3

what is the value indicator in traditional investing

Answer 3

earnings per share

Question 4

what is the value indicator is long term value creation

Answer 4

sophisticated DCF with scenarios for internalisation

Question 5

most of the benefits form diversification exists between how many stocks

Answer 5

0-40

Question 6

what are the investment chains like in traditional investing

Answer 6

long and complicated

Question 7

what are the investment chains like in long term value creation

Answer 7

short and simple

Question 8

what are the limitations for inclusion of ESG factors onto prices

Answer 8

they are add-ons and do not address the core issue

there are design limitations as they are based only on disclosed information, and their is no verification for what is being claimed

Question 9

what is included in active investing approach

Answer 9

Allocating assets from fundamental ESG analysis

more concentrated portfolio

engagement with companies

alternative measures of performance

Question 10

what is the adaptive market hypotesis

Answer 10

says that a degree of market efficiency depends on market ecology

and the pricing of ESG information will depend on the number and quality of market participants. So the more companies and investors taking these environmental issues seriously, the more the market will adapt to include these in the pricing

Question 11

if there is low uptake from individuals to change, is this an efficient market

Answer 11

no

Question 12

what can be explained by adaptive market hypothesis

Answer 12

why new risks eg carbon tax increases are not fully priced

Question 13

which companies do tend to be correctly priced

Answer 13

large companies

because they are in the media a lot and have a lot of equity analysts covering them

Question 14

which is more plausible
Efficient market hypothesis
Adaptive market hypothesis

Answer 14

Adaptive

Question 15

does effiency in a market go through cycles

Answer 15

yes

Question 16

what does it mean to move from ESG factors to fundamental esg analysis

Answer 16

some things just cannot be numbered eg social factors

rating agencies aren’t always aligned with eachother

just more standardisation needs to be done so you cannot just compare based on ESG rankings alone

Question 17

what are some examples of changes in accounting auditing

Answer 17

now trying to value intangibles like brands, R&D stc

Question 18

what are the negatives of over diversification

Answer 18

serious engagement with individual investments not feasible. Might be shallow such as voting but not dialogue

there is a point where extra diversification no longer creates benefits, most benefits are in the early stages

Question 19

what is the ideal level of engagement for active investing

Answer 19

being integrated in the process from analysis to selection

pressuring the board to end unsustainable practices, improve their reporting etc

Question 20

what should firms use as alternative measures of performance

Answer 20

KPIs that are not just linked to earnings

should also have environmental and social targets

Question 21

why would a step up coupon be a good idea incentive for SDG bonds

Answer 21

to make firms stick to what they said and use that money on enviromental/social purposed

Question 22

what are the steps in the value driver adjustment approach

Answer 22

1. Identify and focus on the most material issues
2. What is the impact of these issues on the company?
3. Quantify advantages and disadvantages - what positive and negative externalities are not being charged for
4. Active dialogue

Question 23

what is corporate governance

Answer 23

deals with conflicts of interests between owners/shareholders and managers of a firm

Question 24

what is the difference between europe and US when it comes to sustainable investing

Answer 24

Europe says pension funds are obliged to take ESG factors into account

In the US if it is found out that taking ESG factors into account hurt the financial performance of the pension fund, you could be sued

Question 25

some alternatives to privately listed companies

Answer 25

private equity
cooperation
b corporation
social enterprise
governmental organisation

Question 26

what is a B corp

Answer 26

certified company meeting social and environmental standards (but no legal status)

Question 27

what is the tragedy of the horizons problem

Answer 27

most of the costs are now and the benefits in the future so there is little incentive for this generation to act

Question 28

mechanisms to reduce short termism

Answer 28

avoid single focus on financial results

report on development goals F + S + E

Question 29

what does SRI stand for

Answer 29

socially repsponsible investment

Question 30

what does EFT stand for

Answer 30

electronic traded funds

Question 31

what is good about EFTs

Answer 31

low transaction costs
low management fees
still provides good return for investors

Question 32

why is quantitative analysis not enough when analysing for investments

Answer 32

relies heavily on past information and this might not be relevant for the more green and circular way of the future

Question 33

What are the 5 forces that can cause externalities created by companies to become internalised

Answer 33

1. Government (could be blacklisted by a government in a certain country, governments create taxes eg carbon tax)
2. Financials
3. Corporates (want a balance between profitability and sustainability, eg Penny’s cannot change its business model overnight)
4. NGOs (increase awareness and drive changes)
5. Customers (tastes can change)