16 - ESG Considerations in Investment Analysis Flashcards
Corporate ownership structures can be classified as
concentrated, dispersed, or a hybrid
concentrated ownership
single shareholder or a group of shareholders have control over the corporation
Dispersed ownership
shareholders are numerous and none has control
vertical ownership
where the group has a controlling interest in holding companies, which in turn have controlling interests in operating companies
horizontal ownership
where companies with common suppliers or customers cross-hold each other’s shares
minority shareholder (i.e., holding less than 50% of shares) could have control of a corporation through
vertical ownership or a horizontal ownership arrangement
Dispersed ownership and dispersed voting power
shareholders (called weak shareholders) do not hold power over managers (called strong managers).
principal–agent conflict is likely
principal–agent conflict
shareholders want shareholder value maximized, while managers may use the firm’s resources to their own advantage
Concentrated ownership and concentrated voting power
“strong” shareholders hold power over minority shareholders and “weak” managers
principal–principal problem may arise
principal–principal problem
controlling owners can take advantage of firm resources to the detriment of minority owners.
Dispersed ownership and concentrated voting power
controlling shareholders gain control over other minority shareholders through pyramid structures or dual-class shares, despite the controlling shareholders having less-than-majority ownership
Concentrated ownership and dispersed voting power
occurs in the presence of voting caps, where the voting rights of large share positions are restricted
Some of the major ownership structure factors that impact corporate governance include:
Director independence
Board structures.
Special voting arrangements
Corporate governance codes, laws, and listing requirements
Stewardship codes.
Director independence.
When a board member has no significant remuneration, ownership, or employment relationship with the firm, the board member is considered independent. I
Board structures
Boards of directors can generally be categorized as one- or two-tier
A one-tier board
most common and is made up of both internal (executive) directors and external (nonexecutive) directors .
two-tier board
the management board is overseen by a supervisory board
supervisory board performs functions such as
management compensation, supervising external auditors, and reviewing the firm’s financial records
shareholder activism
techniques used by shareholders to force management to act in shareholders’ interests.
CEO duality
occurs when the chairperson of the board is also the chief executive officer (CEO)
Clawback policies
allow firms to reclaim past compensation if inappropriate conduct comes to light later
Say-on-pay
give stakeholders the opportunity to vote on executive compensation
dual-class structure
the shares held by the firm’s founders or management have more voting power than those sold to external investors
Materiality
impact on the company’s share price, its operations, or other financial aspects
How to identify a companys ESG factors
ESG data providers.
Industry organizations.
Proprietary methods.
Security Analysis: Fixed Income vs. Equity (ESG)
Fixed-income analysts usually will focus on ESG factors’ downside risk.
Equity analysts consider both the upside and downside impact of ESG factors when valuing a firm’s stock.
Green bonds
fixed-income instruments used to fund projects related to the environment.
