The ESG Market Flashcards
What are the largest Sustainable Investment Strategies (SIS) as of 2018?
Negative (exclusionary) Screening with a combined $20tn in AUM followed by ESG integration at $17.5tn.
List the main stakeholders in ESG investing….?
A) Asset Owners: Legal owners of assets making allocation decisions exp) pension funds, sov wealth, FOs
B) Asset Managers: Act as agent of AOs managing assets. Have fiduciary duty.
C) Fund Promoters: Platforms and Consultants aka Intermediaries
D) Financial Service firms like banks, exchanges, rating agencies
E) Regulators/Policy Makers
F) investees
G) Government
H) Society and Academia
What defines the effectiveness of AOs in steering the investment value chain? Name some clauses used in mandates?
1) number of AOs implementing responsible investment (RI)
2) Total AUM
3) Quality of implementation across different assets
(The above creates a multiplier effect.)
Clauses used include:
Specific requirements like voting, engagement, ESG incorporation or acting in accordance with criteria
Reporting to demonstrate ESG characteristics of portfolio or impact of ESG issues on performance
Challenges face by Asset Managers in integrating ESG?
1) Lack of clear signals from AOs
2) Narrow interpretation of objectives used by consultants and advisers to base advice to AOs
3) Resource challenges especially from investors who see ESG investing as separate objectives from core investment processes
How can consultants help bring investment strategy to be more aligned with ESG objectives?
1) Aid trustees in understanding their fiduciary obligations
2) formulate an ESG strategy
3) draft investment principles and policies in line with above (1 & 2)
How can investment platforms influence AM industry?
Increase awareness of ESG funds to both retail and institutional investors while enabling easier identification of information on these funds
How do policymakers affect the ESG landscape?
And what 3 themes do their regulations generally take?
Their actions have a deep impact on the stability of the financial system and the risks to individual portfolios
Regulations generally involve three themes:
1) Corporate Disclosure - Guidelines encourage companies to disclose information on material ESG risks
2) Stewardship - Protects shareholders and beneficiaries as well as stability of market
3) Asset Owners Mandates- typically focused on pension funds requiring them to integrate ESG and disclose the process and outcome.
What is the EU SFDR? What are its aims?
Sustainable Finance Disclosure Requirement published in 2019 creates requirements to promote consideration of E & S risks that may affect investments.
Aim is to enhance transparency of sustainably linked products to prevent green washing. Also to identify the principal adverse indicators that have negative impact on E & S stemming from investment decisions.
What is Network for the Greening of the Financial System?
Group of 100 plus central banks and senior mgmt explicitly recognize climate risks as a supervisory mandate challenging banks to limit impacts of climate change.
What is the EU Taxonomy Regulation and name its 6 objectives?
Published in June 2020 - framework states conditions for an economic activity to be considered environmentally sustainable. These include
- substantial contribution to at least one environmental objective
- doing no significant harm to any other environmental objectives
- comply with minimum social and governance safeguards
Six objectives:
1) Climate Change (CC) mitigation
2) CC adaptation
3) Sustainable use and protection of water and marine resources
4) Transition to circular economy
5) Pollution prevention and control
6) Protection and restoration of biodiversity and ecosystem
in 2017 the TCFD released climate-related financial disclosure recommendations to help firms disclose information to support capital allocation. Name them?
1) Governance
2) Strategy
3) Risk Management
4) Metrics and Targets
What is does ERISA\ do?
As part of the DOL - Employee Retirement Investment Systems Act sets standards for fiduciaries of defined benefit/contribution plans (pensions) based on a principle of a prudent persons. Private sector uses ERISA principles as a benchmark for best practices in relation to governance standards for fiduciary duties.
Generally speaking:
1) Act solely in the interest of the plan participants and beneficiaries
2) Invest with care, skill, and diligence.
3) Diversify plan investments to minimize the risk of large losses. Plan sponsors that breach any of these duties may be held personally liable.
What are investees?
All entities in which investments can be made including:
- companies
- projects exp. infrastructure related or JVs
- agencies exp. World Bank, IFC
- jurisdictions exp. countries, regions
Name the primary ways in which responsible investment plays a role in achieving positive outcomes for society as recognized by government?
1) Social Systems and public pensions provide financial stability for many citizens
2) Restoration of public infrastructure including water systems, transportation, energy grids, etc.
3) Transitioning to a low carbon economy (LCE) requires a substantial shift of capital
How can academia help the ESG investment agenda?
They are influential in validating the business case for integrating ESG within the investment process including how integration can impact investment returns and financial markets.
