16 - ESG Considerations in Investment Analysis

Question 1

Corporate ownership structures can be classified as

Answer 1

concentrated, dispersed, or a hybrid

Question 2

concentrated ownership

Answer 2

single shareholder or a group of shareholders have control over the corporation

Question 3

Dispersed ownership

Answer 3

shareholders are numerous and none has control

Question 4

vertical ownership

Answer 4

where the group has a controlling interest in holding companies, which in turn have controlling interests in operating companies

Question 5

horizontal ownership

Answer 5

where companies with common suppliers or customers cross-hold each other’s shares

Question 6

minority shareholder (i.e., holding less than 50% of shares) could have control of a corporation through

Answer 6

vertical ownership or a horizontal ownership arrangement

Question 7

Dispersed ownership and dispersed voting power

Answer 7

shareholders (called weak shareholders) do not hold power over managers (called strong managers).
principal–agent conflict is likely

Question 8

principal–agent conflict

Answer 8

shareholders want shareholder value maximized, while managers may use the firm’s resources to their own advantage

Question 9

Concentrated ownership and concentrated voting power

Answer 9

“strong” shareholders hold power over minority shareholders and “weak” managers
principal–principal problem may arise

Question 10

principal–principal problem

Answer 10

controlling owners can take advantage of firm resources to the detriment of minority owners.

Question 11

Dispersed ownership and concentrated voting power

Answer 11

controlling shareholders gain control over other minority shareholders through pyramid structures or dual-class shares, despite the controlling shareholders having less-than-majority ownership

Question 12

Concentrated ownership and dispersed voting power

Answer 12

occurs in the presence of voting caps, where the voting rights of large share positions are restricted

Question 13

Some of the major ownership structure factors that impact corporate governance include:

Answer 13

Director independence
Board structures.
Special voting arrangements
Corporate governance codes, laws, and listing requirements
Stewardship codes.

Question 14

Director independence.

Answer 14

When a board member has no significant remuneration, ownership, or employment relationship with the firm, the board member is considered independent. I

Question 15

Board structures

Answer 15

Boards of directors can generally be categorized as one- or two-tier

Question 16

A one-tier board

Answer 16

most common and is made up of both internal (executive) directors and external (nonexecutive) directors .

Question 17

two-tier board

Answer 17

the management board is overseen by a supervisory board

Question 18

supervisory board performs functions such as

Answer 18

management compensation, supervising external auditors, and reviewing the firm’s financial records

Question 19

shareholder activism

Answer 19

techniques used by shareholders to force management to act in shareholders’ interests.

Question 20

CEO duality

Answer 20

occurs when the chairperson of the board is also the chief executive officer (CEO)

Question 21

Clawback policies

Answer 21

allow firms to reclaim past compensation if inappropriate conduct comes to light later

Question 22

Say-on-pay

Answer 22

give stakeholders the opportunity to vote on executive compensation

Question 23

dual-class structure

Answer 23

the shares held by the firm’s founders or management have more voting power than those sold to external investors

Question 24

Materiality

Answer 24

impact on the company’s share price, its operations, or other financial aspects

Question 25

How to identify a companys ESG factors

Answer 25

ESG data providers.
Industry organizations.
Proprietary methods.

Question 26

Security Analysis: Fixed Income vs. Equity (ESG)

Answer 26

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.

Question 27

Green bonds

Answer 27

fixed-income instruments used to fund projects related to the environment.