11 Investor Use

Question 1

What are four benefits that SASB standards offer investors?

Answer 1

1) decision-useful, financially material data for benchmarking and evaluating company performance
2) data to inform analysis and understanding of sustainability risk at the portfolio level
3) a transparent, market-informed, and trusted framework for ESG integration to help generate sustainability data that aligns with investment strategy
4) a roadmap for sustainability-related engagement topics to discuss with portfolio companies, specific to their industry

Question 2

A wide variety of individuals and organizations invest in capital markets, reflecting various strategies, risk tolerances, objectives, time horizons and sources of capital. What is a characteristic that all investors share?

Answer 2

They value information
The more opaque the company is about its operations and outcomes, the more difficult it is for investors to assess.

Question 3

What are examples of how institutional investors may incorporate ESG information?

Answer 3

-to enhance their ability to generate alpha (i.e. increasing financial return beyond a benchmark)
-to manage risk and mitigate potential value loss
-to help deliver valuation and may yield superior risk-adjusted returns

Question 4

What are examples of how asset managers may incorporate ESG information?

Answer 4

-a responsibility as part of their fiduciary duty / duty of care to include material sustainability information in its portfolio-level impacts

Question 5

What are examples of how brokerage firms may incorporate ESG information?

Answer 5

-offer sustainable investing programs designed to support retail investors that want to “do well while doing good”

Question 6

What are examples of how endowments, foundations, and high-net-worth individuals may incorporate ESG information?

Answer 6

-invest sustainably because they want to have a positive impact and/or align their investments with their philosophical views or organizational missions

Question 7

What are examples of how other investors may incorporate ESG information in seeking “dual returns”?

Answer 7

investments that generate both alpha-generating / risk-reduction benefits and mission alignment. Instead of a tradeoff of “value” and “values”, invest in a way that enhances financial value while aligning with ethical, philosophical, religious or other moral values.

Question 8

What are five questions that exemplify how SASB Standards can help investors achieve their unique goals?

Answer 8

1) how do sustainability issues impact the core value drivers in industry-level analysis?
2) how do emerging sustainability risks and opportunities unfold over the investment time horizon?
3) how do companies leverage opportunities or mitigate risks related to material sustainability issues? how can sustainability issues be integrated into firm-level analysis either on a comparative basis or in terms of fundamental valuation?
4) how do differentiated, industry-specific sustainability factors affect a portfolio across all sectors? Which sectors or industries are facing sustainability headwinds or tailwinds?
5) how do sustainability issues impact key signals of risk and return pertinent to underwriting decisions?

Question 9

How do UBS and Nordea Asset Management use SASB Standards in their investment processes?

Answer 9

-UBS incorporates it into traditional fundamental analysis to audment and help identify equities that are both attractively priced today and poised to deliver returns over the long term
-Nordea integrates into investment strategy, fundamental analysis, and valuation analysis in stock selection when building and adjusting the firm’s emerging market equity fund

Question 10

When State Street Global Advisors uses SASB to power the R-Factor, what is it and what does it do?

Answer 10

An ESG scoring system for listed companies that is fully integrated into its asset stewardship program, enabling focused corporate engagement and emporting boards and management teams to assess and address specific sustainability dimensions

Question 11

How does standardization of sustainability disclosure save investors time, improve price discovery and market efficiency?

Answer 11

They shift from time-intensive process of adjusting non-comparable information to fit into their own models and frameworks the analyzation and interpretation of the information. To the extent sustainability information and financial statements are reported together, it can also reduce reporting friction and contribute to more efficient markets.

Question 12

What are the two high level areas related to a spectrum of the use of sustainability information by investors?

Answer 12

1) finding common ground
2) a range of investment strategies

Question 13

What is the high level description of the two sustainability investment strategies drawn from commonalities of a number of institutional, bank and asset management sources?

Answer 13

1) Exclusionary or negative screening - making decisions to avoid an objectionable or low-performing investment such as weapons manufacturing or tobacco
2) prioritization or positive screening - making decisions about which investments to actively select such as beverage manufacturers that prioritize managing water risk

Question 14

Though dichotomous, are the two approaches to sustainability investing mutually exclusive? Why or why not?

Answer 14

They are not mutually exclusive and are often combined, often depending upon the asset classes or industry. Most investors will use an exclusionary investment strategy in companies demonstrating risky behavior or poor risk management even if their strategy does not center on it.

Question 15

What is the umbrella term referring to the earliest uses of sustainability information in investing? And what were the first practices?

Answer 15

Socially responsible investing
Often entailed exclusing investments affiliated with geographic conflicts (apartheid) and operating in “sin stock” industries

Question 16

Name the seven sustainable investment strategies and categorize them as either exclusionary or inclusionary.

Answer 16

Exclusionary:
-values-based screens
-norms-based screens

Inclusionary:
-positive screening - best in class application
-positive screening - ESG Momentum approach
-thematic investing
-impact investing
-ESG integration

Question 17

What is the difference in values-based and norms-based screens? And when does the screening happen?

Answer 17

Values-based screens aim to avoid investments based on the beliefs or ethical standards of the investors (e.g. screen out “sin stocks” or avoid geographies for human rights concerns)
Whereas norms-based screening tends to exclude investments based upon company’s behavior regarding internationally accepted norms and standards surrounding human rights, labor practices and other issues (e.g. BP oil spill or Volkswagon emissions scandal); investors sometimes rank such events according to their severity

The screen typically takes place before any investment analysis

Question 18

Why do some investors set a limit on revenue generation from a line of business as part of the exclusionary screening strategies?

Answer 18

Values-based exclusionary decisions are not black-and-white or yes/no decisions. Some otherwise attractive investments have small subsidiaries involved in alcohol or with cocoa-sourced products that make up a small fraction of the total product mix, and so investors may set a limit of 5, 10 or 30 percent of total revenue.

Question 19

Describe the difference between best-in-class and momentum positive screening and which one has newer companies.

Answer 19

Best-in-class refers to the selection of companies that meet a defined ESG performance hurdle, usually measured by an ESG score or ranking and the theory assumes that companies that demonstrate effective management of financially material ESG will outperform financially.
Momentum strategies, sometimes called directional strategies, target companies that do not meet top performance hurdles but that demonstrate recent, significant improvement in ESG performance, with the theory that by over-weighting companies likely to experience significant jumps in performance, they can realize larger gains than the marginal / often diminishing best-in-class approach. This approach is good for new companies.

Question 20

Which type of sustainability investment strategy can influence corporate behavior by creating a competition among companies on sustainability measures?

Answer 20

Positive screening for momentum or directional strategies because it can look at the scores over a two-to-four year period to calculate a momentum factor

Question 21

Describe ‘thematic investing’ strategy and what thematic investors often experience as a result of this strategy

Answer 21

Investors optimize allocation to a specific ESG issue or broader sustainability trend such as renewable energy technology, social entrepreneurship or water resource stewardship.
Thematic investors often experience a high tracking error given the focused approach, where there is a measurable difference between the returns expected by the investor and the returns received.

Question 22

Describe how impact investing is different than strictly values-based or thematic approach, and what are the three characteristics of it per the FSA curriculum.

Answer 22

Impact investing considers sustainability information in investment products and strategies with the goal of creating positive impacts alongside financial returns.

The three characteristics are:
1) Intention - an impact investor acts with the explicit goal of achieving social or environmental impact versus if an investment inadvertently generats positive ESG returns
2) Impact measurement - impact generated by the investment is nearly always measured and reported to assess whether the investment achieved the desired impact and performance is tracked through qualitative and quantitative impact data
3) Impact management - data informs decision-making with the goal of mitigating negative impacts and maximizing positive outcomes. Financial returns are considered, but impact investing often expects that returns may range from below market to market rate versus traditional investing.

Question 23

Describe thematic bonds and what it means when they have an impact hurdle

Answer 23

A practice of impact investing such as green bonds, climate bonds, social bonds, and sustainability-linked bonds, created to fund projects that generate positive impacts that are identical to traditional bonds in terms of structure, risk, and return while differing on adhering to specific additional criteria and reporting requirements.
An impact hurdle stipulates the rate at which investors will be paid back based upon a bond’s ability to achieve pre-defined impact targets.

Green = financing renewable energy or sustainable infrastructure
Social = education access or prison reform
Sustainability = a combination of social and environmental impact

Question 24

Describe the practice of ESG integration strategies and how its purpose is different from values investing strategies

Answer 24

ESG integration incorporates sustainability information into traditional securities selection alongside a mosaic of traditional financial factors, which allows the users to assess and adjust traditional materiality analysis using sustainability information. Examples are adjusting financial models for revenue, costs, off-balance-sheet liabilities or adjustments to capital cost.
The purpose is not to apply social or environmental values, but to consider whether ESG factors contribute to, or detract from, the financial prospects of a given investment opportunity.

Question 25

Put the sustainability investment strategies in order from most values-focused to least values-focused

Answer 25

Impact investing
Negative screen
Thematic screen
Positive screen
ESG integration

Question 26

In terms of its strategy goals, why are thematic and positive screens more values-focused than ESG integration? (or vice versa, why is ESG integration more value focused than thematic or positive screens?)

Answer 26

Thematic strategies target investments for their exposure to specific sustainability themes though are not necessarily optimized for sustainability outcomes.
A positive screen strategy includes specific companies / sectors associated with positive ESG activities and specific sustainability opportunities linked to financial performance.
ESG integration targets investment for ESG performance because it reflects operational and financial performance.

Question 27

Asset managers and asset owners can engage in investment stewardship and active ownership practices through any of the sustainability strategies except which kind?

Answer 27

exclusionary screens

Question 28

What is the example of industry-agnostic disclosure guidance that can be universally applied to any company regardless of industry?

Answer 28

Corporate governance information or codes because it is a common component of disclosure principles related to shareholder rights, board responsibilities and incentives that are across industries

Question 29

Why is the Solar Technology & Product Developers industry and Water Utilities & Services industry examples of industry-specific investors focus on sustainability data?

Answer 29

Both have Material Sourcing & Efficiency disclosure topic of interest.

For solar, it highlights how solar companies manage the risk associated with sourcing a critical material for their product manufacturing (polysilicon) on which they increasingly compete on price and environmental benefits.

This disclosure topic highlights for water utilities how the company is able to manage and contribute to water supply resilience.

Question 30

Explain why the market is grappling as to whether human capital is industry agnostic or industry specific?

Answer 30

The value of all companies depends on the skills, knowledge and experience possessed by leadership, staff and workforce.
However, a company’s labor force often has unique value implications depending upon the business model and operating environment.

Question 31

Explain how human capital may be industry specific between an IT company and the agriculture sector.

Answer 31

An IT company competes on recruiting top talent and intellectual property and it woudl be important for an investor to know how there is recruitment, management and retention of this highly skilled workforce. In agricultural products where there is exposed working conditions and heavy machinery, an investor would want to know more about workforce health and safety.

Question 32

What are two environmentally and societally material metrics that are often industry agnostic?

Answer 32

gender equality policies and respect for human and labor rights.

Question 33

At a high level, what are the three considerations at the pre-investment stage?

Answer 33

1) data decisions
2) industry analysis
3) fundamental analysis

Question 34

What are two ways investors use SASB’s industry-specific Standards when making data decisions?

Answer 34

1) they use the topics identified as a template for what is financially material for ESG risks and opportunities since it can be challenging to identify it independently and they struggle to find the signal from ESG data sets
2) if an investor is seeking data that is not available in the market and it is within the SASB standard for that industry, it offers a clear way for them to ask their portfolio companies for the data

Question 35

Name four portfolio level strategies of ESG integration (circle illustration)

Answer 35

Scenario analysis
Risk Management
Portfolio construction
asset allocation

Question 36

Name ten security level strategies of ESG integration across security valuation for fixed income (5), for equities (4), and for both (1).

Answer 36

Security valuation - Fixed Income:
internal credit assessment; forecasted financials & ratios; relative thinking; relative value analysis / spread analysis; duration analysis

Security valuation - Securities:
forecasted financial ratios; valuation multiples; valuation-model variables; forecasted financials

Equities & Fixed Income:
security sensitivity / scenario analysis

Question 37

What are examples of research in ESG integration? (name majority of 11 total)

Answer 37

ESG integrated research note
Centralized research dashboard
ESG agenda at committee meetings
Voting
Individual / collaborative engagement
Company questionnaires
Red-flag indicators
Watch lists
Internal ESG research
SWOT analysis
Materiality framework

Question 38

How do analysts performing research for active management strategies in public equities use sustainability information in industry analysis?

Answer 38

It is a framework for consistently analyzing and valuing peer companies in an industry since every industry have different value drivers and risk factors. Analysts require information for management of sustainability risks and opportunities, and identify changes in market dynamics that may affect a company’s earnings capacity and assess the impact of legal and regulatory changes in each market.

Question 39

How do sell-side analysts incorporate sustainability information into their industry analyses?

Answer 39

They typically provide buy/sell recommendations and stock price targets based on investment theses and value drivers related to industry-specific dynamics, driven by specific valuation methods and models. As ESG data availability and comparability improves, it will be easier to include financially material ESG information

Question 40

Name the two main mechanisms through which the SASB’s analysis of sustainability issues and related financial impacts can complement or improve the typical research analysis framework

Answer 40

1) illuminating additional value drivers or risk factors
2) providing factors that impact existing value drivers, risk factors, and valuation models

Question 41

In the example of SASB topics in industry analysis for the automobile industry, what are the three sustainability impacts on value drivers from the reading?

Answer 41

1) Revenue growth - from a product mix with demand for smaller, more fuel-efficient and low-emission vehicles paired with a corollary impact switch from larger, higher margin vehicles
2) Operating costs and CAPEX: materials scarcity can lead to higher costs, R&D, and CAPEX for substitution, whereas sourcing, materials used and production efficiency can mitigate the impact
3) Option value / scenario analysis: the risk profile is heightened by large investment in alternative power trains such as EV / fuel-cell with uncertain outcomes

Question 42

What makes the industry analysis for securities and debt the most distinct and different for using ESG data?

Answer 42

Equity analysis can focus on risk analysis as well as upside investment potential, whereas because bonds have a pre-determined duration of payment schedules it focuses almost exclusively on evaluating and pricing risk over the time horizon.

Question 43

What are the four key areas of risk of the fixed income investing assessments?

Answer 43

-credit risk
-interest risk
-yield curve risk
-liquidity risk

Question 44

Where industry analysis helps investors understand a company’s position and performance relative to others in the industry, what does fundamental analysis do?

Answer 44

Aims to evaluate the intrinsic value of a security by examining relevant financial and economic factors in order to determine whether a security is correctly valued.

Question 45

Practitioners of fundamental credit analysis for fixed income use key credit ratios adjusted for ESG issues to do what?

Answer 45

To understand the creditworthiness of the company and whether it is deteriorating or improving, and to evaluate the potential impact on credit ratings and credit spreads

Question 46

What are the two types of analysis or valuation that fundamental analysis can include?

Answer 46

Comparative analysis - which seeks to compare industry peers to one another
Company or security valuation - which aims to determine the appropriate value of a company using various inputs and models

Question 47

What is an example for how sustainability factors can negatively affect a company’s operations to the extent that one or more product lines or even entire operations, are compromised as part of comparative fundamental analysis?

Answer 47

climate-related regulation and the falling costs of clean energy have led to stranded coal-fired production assets in some regions.
Forward-looking companies that understand and act on sustainability will be better positioned than less proactive peers to mitigate the related operational risks.

Question 48

What are two kinds of company or security valuations?

Answer 48

1) discounted cash flow analyses
2) enterprise valuation models

Question 49

What did the Bank of America quantitative analysis team find regarding sustainability metrics for company or security valuation?

Answer 49

Sustainability metrics were valuable signaling tools, reliably identifying future volatility, earnings declines, stock risk, price declines, and bankruptcies

Question 50

Where are more predictable and/or quantifiable factors incorporated in company or security valuation as compared to less measurable factors?

Answer 50

More predictable or quantifiable are incorporated into earnings projections
Less quantifiable are incorporated into discount rate adjustment

Question 51

What is the example where SASB found a disclosure topic for the Construction Materials industry affected revenues?

Answer 51

For Product Innovation disclosure topic for this industry, they found it increased revenues through demand for products and services. Specifically, there are credible estimates that the global market for green construction materials is expected to grow at a compounded annual growth rate of around 10 percent from 2019 to 2024.

Question 52

Name the four financial drivers and the five associated types of financial impact

Answer 52

Revenue (2) - Demand for products and services;
-intangible assets and long-term growth
Cost - operational efficiency / cost structure
Assets and Liabilities - valuation of core assets and liabilities
Cost of capital - operational risks and cost of capital

Question 53

Name the metric type, financial analysis and an industry example for the financial driver Revenue and impact Demand for products and services

Answer 53

Metric Type: quantitative & qualitative measures of product features sought by customers or required by law
Financial analysis: market share and revenue forecast for discounted cash flow (DCF) growth in the context of price-based ratios (PE or PEG ratios)
Example: product safety in automobiles

Question 54

Name the metric type, financial analysis and an industry example for the financial driver Revenue and impact Intangible assets and long-term growth

Answer 54

Metric Type: quantitative & qualitative measures of factors / actions that drive reputation and brand value
Financial analysis: long-term revenue growth and terminal value in DCF growth in the context of price-based ratios (PE or PEG ratios)
Example: counterfeit drugs in biotech & pharmaceuticals

Question 55

Name the metric type, financial analysis and an industry example for the financial driver Cost and impact Operational efficiency and cost structure

Answer 55

Metric Type: quantitative measure of operational efficiency and regulatory compliance
Financial analysis: current cost drivers and estimates of future costs for DCF; operational performance & cost structure for profitability ratios (e.g. ROI)
Example: environmental footprint of hardware infrastructure in Internet & Media Services

Question 56

Name the metric type, financial analysis and an industry example for the financial driver Assets & Liabilities and impact Valuation of core assets & liabilities

Answer 56

Metric Type: quantitative measure of factors that affect the valuation of assets and liabilities
Financial analysis: impacts on valuation methods for assets and liabilities; impacts on assets and liabilities for asset-based ratio (ROI, RRR, solvency)
Example: reserve valuation & capital expenditures for oil & gas exploration and production

Question 57

Name the metric type, financial analysis and an industry example for the financial driver Cost of Capital and impact Operational risks and cost of capital

Answer 57

Metric Type: quantitative measure of risk (VaR) or number of incidents
Financial analysis: quantification of risk to forecasted profits and adjustment of cost of capital
Example: business ethics (commercial banks)

Question 58

Are SASB topics linked to more than one type of financial impact?

Answer 58

Yes

Question 59

How is the SASB disclosure topic related to data breaches for Internet Media & Services industry an example of how the Standards can support qualitative fundamentals as well as contributing to the analysis of quantitative financial information?

Answer 59

There are quantitative metrics for the number of breaches, percentage of breaches involving PII and the number of users affected, as well as qualitative Discussion and Analysis metrics for describing management’s approach to identifying and addressing data security risks.

Question 60

For the bar graph of a hypothetical Utilities & Power Generators company, how did the current value change when moving towards a fully integrated ESG model of valuation for GHG emissions, Water Scarcity and Workforce Health & Safety?

Answer 60

GHG Emissions decreased the most due to: 1) Operating costs increased due to risk of carbon tax scenario and renewable energy purchases 2) capex requirements to upgrade plant infrastructure 3) one-time charges for early
plant retirements
Water scarcity risk was a smaller decrease in valuation.
Workforce health & safety was an increase in valuation.

Question 61

Can what constitutes financially material sustainability information in public equity analysis be different than in credit analysis when applied to the same corporate issuer? Why or why not?

Answer 61

Yes. Relative to credit analysis, public equity investors will base their buy / sell / hold decision on the upside groth potential of a firm, and will therefore look for equities that maximize upside growth with limited downside risk. When considering extending credit to the same firm, fixed income investors will focus more on the company’s ability to repay debt and interest rather than on upside potential.

Question 62

As fixed income investors perform their credit risk analyses, what two areas of downside risk do they focus on and how does ESG factor in?

Answer 62

1) default probability
2) loss severity
ESG factors that will increase the probability of default

Question 63

What does research from Wharton School at UPenn and from Bank of America point towards given the longer-term horizon of creditors and their focus on downside risk as it relates to ESG?

Answer 63

Integrating ESG into traditional risk analysis is compelling in terms of the risk mitigation benefit from higher ESG performance and can provide a strong indicator of bankruptcy avoidance

Question 64

Why might fixed income ESG risk analysis also necessitate a high level of granularity?

Answer 64

Example from the reading is the ESG risk profile of the company at an aggregate level may be very different than the risk profile of an individual bond by its region and location, such as for a mining operation in Brazil versus Australia even when owned by the same firm.

Question 65

What was the example of how industry-specific, financially material sustainability information supported and improved company-level financial analysis for fixed income investments and credit research by Payden & Rygel?

Answer 65

They were able to research the supply chain and food management for a large McDonald’s franchisee on nutritional content and fair labor practices to gain confidence in the target company’s ability to repay debt in Brazil, which as a region has unreliable third-party ESG data.

Question 66

How are green or climate bonds similar to and different from their traditional counterparts?

Answer 66

Similar: backed by the issuing entity’s balance sheet and therefore carry the same credit rating as their issuer’s other debt obligations
Different: they also come with tax incentives and are widely believed to be a means to access low-cost capital held by institutional investors for green projects, which represents an attractive opportunity to secure a lower rate tied to a sustainability project or KPIs.

Question 67

What are three ways that private markets’ deal teams conducting due diligence can bolster their analysis with ESG?

Answer 67

1) determining which ESG issues are most likely to have a material financial impact and thus merit assessment during due diligence
2) develop regulatory awareness through engagement on industry-specific ESG matters, which have the potential for creating costs or opportunities for comapnies
3) use questionnaires, scorecards, or other proprietary tools to evaluate a portfolio company’s ESG policies and procedures

Question 68

At a high level, what are two ways that ESG information and the SASB standards help support due diligence in private equity?

Answer 68

1) at the individual company assessment level - such as when Generation applied SASB Standards to assess risk and opportunities in pre-investment research and setting “sustainability thresholds”
2) in sector-based assessments of risk and opportunity that can help inform fund strategy and portfolio level exposure to these risks

Question 69

How does the fact that an index fund is a largely “passive”, rules-based strategy relate to ESG data?

Answer 69

because they do not involve in-depth analysis of individual companies and instead use a formula at scale, there is limited to no human intervention making the availabiltiy of comparable, consistent, reliable data all the more critical when factoring sustainability information into index construction activities

Question 70

What is an example of how an index fund / firm can analyze ESG data effectively to gain a competitive advantage?

Answer 70

In instances where data is broadly disclosed but is not comparable, and the firm develops a way to analyze the data effectively

Question 71

What is the only time that index strategies require active security selection , including for ESG indices?

Answer 71

During index or portfolio construction, which for ESG indices require the index manager to actively set ESG benchmarks and consider risk appetite and volatility limits.

Question 72

Describe a tilt as it relates to using sustainability information in an index fund

Answer 72

Traditionally a tilt fund includes a core holding of stocks selected for their ability to mimic a benchmark index such as the S&P 500 and then securities are added to tile the fund dowards enhanced performance. For ESG tilt, assets are weighted towards ESG performance characteristics either “away” from undesirable characteristics or “towards” desirable characteristics.

Question 73

Can indices use both ESG tilts and screens in index construction? If so, what is an example?

Answer 73

Yes. an example is tilting towards positive ESG characteristics while also applying limited values-based screens such as eliminating tobacco

Question 74

What are three ways that help investors as they are evaluating sector allocation and exposure to material sector-specific sustainability topics?

Answer 74

1) calculating a portfolio’s diversification
2) overall expected return rate
3) risk exposure

Evaluating these three helps investors meet risk-return targets through diversification

Question 75

What type of risk is climate and what type(s) of risk inherent in owning equities are important not to confuse it with?

Answer 75

Climate is a systemic risk, not to be confused with systematic or market risk.

Question 76

How can SICS help investors reduce systemic risk across a portfolio?

Answer 76

classifying industries based on sustainability characteristics can help assess and mitigate systemic risk by analyzing the correlation between different sectors, such as when the financial returns of one sector are highly correlated with another. Sustainability sectors separate and reduce the correlation between sectors which helps investors gain a meaningful tool in mitigating systemic risk.

Question 77

What are three high level ways for integrating ESG into post-investment engagement?

Answer 77

1) active ownership
2) monitoring and engagement
3) proxy voting and resolutions

Question 78

Why might equity investors decide not to sell where sustainability risks are present? What do they do that can add value to both the company and the investor?

Answer 78

The sustainability risk may not be enough to warrant selling, and investors may choose to work with the target company and engage (rather than divesting) thus adding value to both the company and investors via stewardship to safeguard or improve portfolio performance.

Question 79

Which post investment engagement process is indicative of when investors ask for SASB disclosure?

Answer 79

Active ownership

Question 80

What can the data from SASB Standards help public equity investors and index investors do?

Answer 80

Prioritize companies and topics for engagement to inform resulting dialogues and target risks based upon potential exposure

Question 81

What are four reasons that private equity investors may have more robust and frequent engagement?

Answer 81

1) they may take a majority-control stake
2) they have fewer holdings overall
3) they have longer investment time horizons
4) they typically need to find alignment with a smaller investor base

Question 82

When private equity firms choose to pursue close engagements, what can they contribute to ESG performance of the firm?

Answer 82

They contribute significantly through a strong emphasis on stewardship and close contact between the general partner (GP) and company management

Question 83

Why do fixed income investors typically have less engagement or non-existent engagement on ESG?

Answer 83

so long as companies meet their payment obligations, investors typically do not have the leverage to request additional performance goals related to sustainability or otherwise

Question 84

When do investors tend to use proxy votes for ESG rather than management dialogues?

Answer 84

Most investors prefer management dialogues and some press for better ESG governance for risks and opportunities when engagement does not yield desired improvements.

Question 85

What are four ways investors can use their votes on individual ballot items to strengthen corporate governance of emerging ESG risks?

Answer 85

1) voting for specific board members to shape board oversight
2) incentive structures
3) transparency
4) company policies

Question 86

A 2020 analysis of S&P 100 proxy statements found that ____ percent of proxy ballots highlighted ESG governance and developments, indicating what?

Answer 86

70 percent
indicating that listed companies are increasingly responding to investor demand for sustainability information

Question 87

How do benchmarks help investors in their accountability to the performance and outlook fo their sustainability investment strategy? And what is an increasingly typical benchmark for ESG funds and why?

Answer 87

They offer performance comparisons where a client can see the performance of their funds relative to the performance of others, usually an index.

Increasingly ESG investing is benchmarked against non-ESG funds such as the S&P 500 or Russell 1000 Growth because firms recognize that integrating ESG factors enhances risk-adjusted returns.

Question 88

Wespath Investment Management integrated SASB Standards into its annual manager evaluation process, which illustrated what?

Answer 88

The growing demand from asset owners that asset managers authentically integrate ESG considerations to help identify leaders and laggards

Question 89

What are four ways SASB Standards create an effective framework for using ESG information across the stages of the investment process?

Answer 89

1) determining what data to use
2) evaluating investment opportunities and building portfolios
3) stewarding investments, engaging with companies, and proxy voting
4) reporting to clients and stakeholders

Question 90

What are seven existing challenges that current ESG data sources and reporting processes present for integrating into investment decisions?

Answer 90

1) Policies not performance - much of the information is binary and not decision-useful
2) Quantitative data is not always comparable
3) A range of scoring methods - exemplified by ratings agencies with proprietary formulas
4) Sustainability disclosure is often not comprehensive - often limited to data that is easiest to capture
5) Governance and systems of control are not in place - lowering quality
6) Differentiating materiality - some use financial materiality and others use double materiality resulting in “noisy” data
7) Never-ending demands for more information - because there is no one / single standard there is a lot of inefficient efforts

Question 91

An analysis conducted by Goldman Sachs found ___ percent of disclosed E&S metrics constitute performance data, and further only ___ of the 25 most commonly disclosed metrics, which is _____, is quantitative.

Answer 91

11.6 percent of metrics constitute performance

only 1 of the 25, which is GHG emissions
(GHG emissions is 25th, the lowest on the list of most commonly disclosed)

Question 92

How many ways did a study published in the Journal of Applied Corporate Finance find that a random sample of 50 Fortune 500 companies reported employee health & safety data?

Answer 92

20 - showing the inconsistency and lack of comparability

Question 93

How can ESG data be used in emerging markets where there is not the widespread disclosure as in developed markets?

Answer 93

It can be an “edge” when it can be obtained by supporting identification of undervalued companies and/or avoiding unpriced risk.

Question 94

What did an MIT Sloan Study find with regard to the correlation of ESG ratings? And was it the same or different than financial credit ratings?

Answer 94

Found a low correlation of 0.61 for ESG ratings, as compared to 0.99 when comparing Moody’s and S&P.

Question 95

[CHECK FOR UNDERSTANDING] How do disclosures based on SASB Standards help meet the needs of different types of
investors?

Answer 95

Across investment goals, strategies, asset
classes and security types, investors leverage information yielded through the SASB Standards to support investment decisions.
Whether it is an impact investor tracking certain KPIs, a fund manager applying positive or negative ESG screens, an equity analyst integrating ESG into fundamental
analysis, a private equity fund engaging with companies on ESG performance goals, or a credit analyst bolstering risk analysis, the use of ESG data on financially material topics is used to enhance pre- and post-investment decision making.

Question 96

[CHECK FOR UNDERSTANDING] Why are SASB Standards best suited for ESG integration?

Answer 96

With ESG integration, investors adjust
traditional analysis using sustainability information, such as financial models adjusted for
revenue, costs, off-balance-sheet liabilities, or adjustments to capital cost. The
purpose is not to apply social or environmental values to investment decisions, but to consider whether ESG factors contribute to, or detract from, the financial prospects of a given investment opportunity. SASB Standards allow users to assess the material factors that may affect company or sector
performance. This is achieved by intentional analysis of evidence of financial impact throughout the standards development process. SASB Standards are best suited for ESG integration because they are directly linked to the channels of financial impact that are relevant to assessing investment prospects.

Question 97

[CHECK FOR UNDERSTANDING] How is the use of sustainability information in corporate fixed-income different from the use of sustainability information in public equity? How is this similar to or different from the use of sustainability information in private equity?

Answer 97

The similarities and differences between
the use of ESG information across public equity, private equity, and fixed income are nuanced and depend on the specific goals and expertise of the investor. However differences across these asset classes fall at the lines of evaluating upside potential, downside risk, and levels of company engagement. Public equity investors conduct analyses to price securities and evaluate future returns. As such, their ESG analysis will focus both on risks and opportunities related to the firm, with the particular goal of evaluating upside potential. In fixed income, investors are primarily concerned with evaluating a company’s ability to repay and are concerned with factors that may influence default probability and loss
severity. Here, investors’ primary (though no singular) concern revolves around a company’s ability to manage ESG-related risks and protect against downside risk. In private equity, investors traditionally take on a more involved role –engaging with the
company throughout due diligence and the holding period, and often bringing a certain level of managerial expertise to support the company. Here, ESG is often used to identify KPIs and manage performance against those
KPIs over time.

Question 98

[CHECK FOR UNDERSTANDING] How do existing data challenges inhibit investors’ ability to use sustainability data?

Answer 98

Investors experience a wide range of challenges related to sustainability data in the current landscape. For one, there is an abundance of binary, policy-based data and a lack of quantitative performance data disclosed from companies, meaning investors often
have trouble obtaining information that lends direct insight into company performance related to sustainability factors. Even where companies do disclose quantitative performance information, it is not always comparable, as companies reporting on the same ESG topic often use different metrics
and methodologies. In addition, widely-used third party ratings providers typically use different scoring methodologies and data inputs, which can skew analysis for those
reliant upon third-party ratings and rankings.
Sustainability data is also often limited to that which has been historically captured or is easiest to capture, which in some cases can make it difficult for investors to interpret where data captures partial performance of performance of the whole entity. Historically, sustainability data has not been subject to internal controls, board oversight, or assurance processes, limiting its reliability. In addition, a significant amount of sustainability data disclosed by companies is not financially material, making it difficult for investors to differentiate between information that is or is not relevant to their
investment decisions. As demand for quality
sustainability information increases, investors
increasingly request specific data through a
range channels, inundating companies with different requests and impairing efficient communication between companies and their investors.