Sustainable investing and TA Flashcards
Main arguments for sustainable investing
What are the 4 main arguments for sustainable investing?
4 answers
1) Ethics*
2) Impact on economy / society
3) Higher financial returns
4) Lower financial risk
- Could include reputation, compliance, avoiding liability arguments.
What are the four main types of sustainable investing (or ESG investing) discussed in class
- Negative ESG screening Excluding firms from certain sectors or with poor ESG scores
- Positive screening and/or best-in-class Only investing in firms with good ESG scores, or which do better than peer firms in same sector
- ESG integration Including ESG issues as integral part of investment decisions, including impact on risk and return
- Engagement Actively trying to influence corporate policies through engaging with management, shareholder voting, or filing or co-filing shareholder proposals
Reason to reflect on your investments
1) The ethics argument
- Do no harm argument
Human rights violations
Harmful products
Harmful production processes
2 Impact argument, how? 3 ways
Three key ways to impact:
A. Influencing capital allocation
- Tougher to access capital for poorer ESG firms
-They have higher cost of capital and will invest less, because of: i. Pricing of risks, ii. Pricing of preferences
B. Directly influencing firms
- Shareholder votes, engagement, credit oversight
C. ‘Impact investing’
- Provide capital to firms with positive impact
- Private markets, green bonds?
Argument 3) Higher financial returns
What is the argument?
Common argument goes along these lines:
a) Stronger ESG firms have better management
b) Therefore better profitability
c) Therefore better stock returns
However:
* Even if a) is true, this does not imply b)
* Even if b) is true, this does not imply c)
* In efficient markets, higher profitability is priced in
So why could stronger ESG firms have higher stock returns?
* If a) and b) are true but the stock market is slow to realize this (inefficient markets / learning)
* If ESG inflows pushes stock prices of better ESG stocks up (demand effects)
* In short: gradual pricing of risks and/or preferences
Argument 4) Lower financial risk
What does it say?
Common argument goes along these lines:
a) Poorer ESG firms may be exposed to
various sources of risk
b) These risks are hard to diversify
c) Thus better to divest from poor ESG firms
However:
* Again, depends on market efficiency
* In efficient markets, risks are priced and yield a risk premium
* That said:
* It seems less likely that all ESG risks are fully priced
* Because long-term and uncertain (e.g. climate risks)
* Plus: even if climate risks carry a risk premium, should financial institutions really run these risks?
Briefly explain the “capital allocation” channel of generating impact through investments.
The capital allocation channel of impact investing refers to the idea that by increasing (limiting) the flow of capital towards green (brown) firms, the stock prices of green (brown firm) will go up (go down), resulting in a lower (higher) cost of capital for green (brown) funds, boosting (reducing) green (brown) investments. This cost of capital effect could be due to risk and/or preferences.
What is the “irony of impact investing” (in particular, the tension between impact through capital allocation and the notion of “doing well while doing good”)? Distinguish between the short run and the long run.
The irony of impact investing is that the cost of equity capital is the very same as the expected stock return for investors, so in order to generate impact through this channel investors would need to accept a lower expected return in the long run. Thus, in the long run it is not possible to generate impact through capital allocation and to do well while doing good.
In the short run, green firms could have higher stock returns because of (at least) two reasons: 1) Green firms have higher profitability but the market is slow to realize this (learning) 2) Investment flows into green firms slowly push their stock prices up (demand effect)
In the long run, if anything, ESG should be negatively related to stock returns: 1) Better ESG firms trade at higher prices because of investor preferences (and/or limited risk sharing) and thus have a lower cost of capital 2) Better ESG firms are less risky and investors therefore require lower expected returns.
What is beneficence and in what 3 ways can you do it?
Beneficence = investing to have an impact
1. Influencing capital allocation
2. directly influencing firms (shareholder votes)
3. impact investin (provide capital to firms with positive impact)
List of TA tools
Moving averages
Fibonacci levels
Chart Patterns
Oscillators and indicators
Candlestick patterns
Trendlines
Idea behind technical analysis
Prices move in trends, these trends are determined by: Changing attitudes of investors the art of TA is to identify a trend reversal in the early stages
Technical analysis attempts to exploit recurring and predictable patterns in stock prices
to generate superior investment performance. Technicians do not deny the value of fundamental information, but they believe that prices only gradually close in on intrinsic
value. As fundamentals shift, astute traders can exploit the adjustment to a new
equilibrium.
Theoretical principles of Technical Analysis
Process towards price equilibrium can be time consuming, TA can help you observe price efficiently
Market prices are influenced by non fundamental behavior, disposition effect, the notion that investors stay in non profitable positions longer than profitable traders
Technical analysis (chartism) and fundamental analysis can co-exist
Momentum trading
High frequency trading
What are the three main problems with researching the effectiveness of TA?
Data Snooping
Ex post selection of trading rules
difficulties in estimation of risk and transaction costs
