Mock Exam - Repeated Questions Flashcards
Name the 6 Environmental Objectives of the EU Taxonomy
(6 Points)
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
Asset Owners in Responsible Investment
(7 Points)
Asset owners include:
* pension funds
* insurance companies
* sovereign wealth funds
* foundations
* endowments
They generally invest their assets in an investment vehicle with the goal of getting returns from the invested capital.
They seek to maximize returns at a given level of risk, and some derive utility from non-financial impacts as well.
First Green Bond Issuance
Announced in 2007 by the European Investment Bank + World Bank to raise funding for climate-related projects.
Pre-Emptive Rights
(2 Points)
- rights that ensure that an investor has the ability to maintain its position in the company
- company should not issue shares without giving existing shareholders the right to buy an amount sufficient to maintain their existing shareholding
Top-Down Engagement
(4 Points)
- applies a perspective on particular issues (e.g., climate change) across all companies in a sector or market as a whole
- environmental and social issues arise from nature of business activities and tend to be organized by sector
- issue-based, top-down engagement tends to align more closely with passive or otherwise broadly diversified investment portfolios
- starting engagement with investor relations or sustainability teams and then escalated upwards
Bottom-Up Engagement
(3 Points)
- governance issues arise from national laws and codes and tend to be organized by geography
- company-focused, bottom-up engagement fits most naturally with active investment approaches
- starting engagement with chair and working through the board down to management
Engagement for Corporate Fixed Income
(9 Points)
- ESG factors can impact credit rating and affect spreads
- PRI recommends corporate fixed income investors to priotize engagement on:
1. size of holdings
2. lower credit quality issuers (less balance sheet flexibility to absorb negative ESG impacts)
3. key themes that are material to sectors
4. issuers with low ESG scores - easier to push for ESG-related conditions and disclosures while pre-issuance, which is difficult to implement in fast-moving public markets, but is easier to effect in private debt issuance
- possibly more scope for influence where debt investors engage alongside equity investors, but in certain situations - like insolvency - the two investor types may be rivals
- engagement is also important to private debt, private equity and property/infrastructure investments, as they are illiquid, relatively long term and involve close partnership between the investor and investee
Qualitative ESG Analysis
(6 Points)
- human judgement of non-numerical ESG data for analysis
- company-specific research, fundamental analysis and stock picking
- analyze ESG data to form opinion on firm’s ability to manage cartain ESG issues
- link specific aspects of company’s ESG risk management strategy to value drivers (e.g. costs, revenues, profits, capital expenditure)
- analysts/portfolio managers integrate opinion in quantified way into financial models by adjusting assumptions in the model (e.g. growth, margins, cost of capital)
- qualitative techniques might be weigthed differently for different asset classes, e.g. judgement of management incentives have more weight in equity than for fixed income
Quantitative/Systematic Investment Strategies
(5 Points)
- high-frequency trading
- use algorithms based on news or factors and statistical arbitrage
- trend following
- risk parity
- use of beta strategies
ESG Assessment Technique Stages
(7 Points)
Stages are typically:
Research,
* gathering information
* materiality assessments
* tangible and intangible factors
* generating ideas
Valuation, and
Portfolio Construction.
Challenge of Company Disclosure on ESG Topics
(6 Points)
- disclosure of ESG data is often not compulsory
- management has large flexibility in determing what ESG factors are material
- judgement of materiality may also be affected by geographical or cultural differences
- overdisclosure, particularly of non-material ESG information
- no disclosure may not always mean poor ESG management, especially for small companies with limited resources
- ESG information may be commercially sensitive hence may only be disclosed selectively
Criticism on ESG Integration
(5 Points)
- too inclusive of poor companies: ESG mutual funds and ETFs often hold investments in companies that are “bad actors” in one or more ESG spaces
- dubious assessment criteria: criteria used for selecting ESG factors are too subjective; non-material factors might be overemphasized; materiality assessments might be considered flawed
- quality of data: information used for ESG factors often comes from companies themselves; complicates ability to verify, compare and standardize information
- lack on emphasis on long-term improvements: financial advisers screen for performance first and only after for ESG; this can exclude companies with high ESG factors that focus on long-term performance
- evidence for benefits of ESG is mixed or not proven
Do Credit Investors focus on E-, S- or G-Factor?
G-Factor due to downside risk prevention (e.g. bankruptcy risk)
Mean-Variance Optimization (MVO)
(4 Points)
- MVO is a mix of assets that produce minimum standard deviation (risk) for maximum level of expected returns
- Black-Litterman Global Asset Allocation is an MVO model
- sensitive to revised assumptions from ESG considerations
- ESG issues could have impact on assumptions for expected return, volatility and correlation
Liability Driven Asset Allocation
(4 Points)
- Liability Driven Investment (LDI) seeks to find most efficient asset class mix driven by funds liabilities
- concerned with return of assets, change in value of liabilites and how assets and liabilities interact to determine overall portfolio value
- sensitive to revised assumptions from ESG considerations
- ESG issues could impact inflation and alter liability assumptions
