1st video: 0 introduction Flashcards
PRI (Principles for responsible investment 2006)
- we will incorporate ESG in our investment analysis and decision making process
Institutional investors?
Ex: Mutual funds, pension funds, endowments, hedge funds and insurance companies are typical institutional investors. (manages money of future pensioneers)
Or Pictet asset/wealth management
Companies or organizations that invest capital on behalf of their ultimate beneficiaries or
individual clients
Increasingly important in financial markets: majority of public equities held by institutions
Institutionally owned global public equities? in trillions
in 2006/2012/2017?
non PRI signatories / PRI signatories
15.5 / 0.65 in 2006
10 / 7.4 in 2012
13.5 / 18.35 in 2017
non PRI signatories / PRI signatories
*Before stocks were owned directly, now mostly through intermediaries. Thus institutional investors are super important. Thus it is important for them to follow PRI (principles for responsible investment) signatories.
ESG topic has strongly gained popularity at what year? (4)
2019-2020 popularity started to climb, measured by google search interest (Starks 2023 paper). close to covid.
Fact: Mutual fund exposure to high ESG firms has increased over time
- % ownership mutual funds hold of High ESG and Low ESG. Active mutual funds over time started holding more high ESG score companies, rather then LOW. Still more of low, but they are reallocating to high ESG slowly. (Panel A)
To quality as S&P 500?
Must be a U.S. company. Must have a market capitalization of at least $8.2 billion and at least 50 percent of shares must be available (“floated”) on the exchange. Must be traded on a major U.S. exchange, including the New York Stock Exchange or Nasdaq
generally, the higher the number of floating shares, the more liquid the stock. This liquidity is crucial for allowing investors to buy and sell shares without significantly impacting the stock price.
Fact: different providers score companies differently (not perfectly correlated)
Why there is rising interest in ESG? .6
EU commission released a sustainable finance action plan. Many sustainable finance related regulations are on the way.
Many regulations of disclosure. China has an ambitious green finance agenda.
Financial reporting standard setters are developing sustainability disclosure standards. How balance sheets have to be reported, income statement etc.
Also academics
What is sustainable finance? 2 main occurrences?
There is no single definition of it.
Many different forms of sustainable finance. Impact investing, screening, ESG integration, etc. Thus it is hard to make one definition.
However 2 main things occur:
- Long term
- Incorporating ESG issues or other sustainability considerations into decision making
European Commission defines sustainable finance: .8
“Sustainable finance generally refers to the process of taking due account of environmental and social considerations when making investment decisions”
“In the EU’s policy context sustainable finance is understood as finance to support economic growth while reducing pressures on the environment and taking into account social and governance aspects.”
Morningstar? (Hartzmark and Sussman)
financial data provider, that provides data predominantly on mutual funds.
in 2016 they introduced Morningstar sustainability rating for 20000 mutual funds worldwide
Based on fund holdings, the rating scheme ranked the sustainability of existing mutual funds on a percentile basis. Gives globes (1-5)
For investors it became easier to understand sustainability of companies.
Data shows, that money flowing into mutual funds, changed after the day of morning star sustainability reporting introduction (2016). investors realocate money from low sustainability funds and put into high sustainability funds. Meaning that investors care about sustainability (Why they care? maybe they hope that in future those investment will be better. others maybe can’t sleep at night knowing that their money are helping oil companies and etc. it is difficult to answer such questions)
mutual fund?
A mutual fund is an investment option where money from many people is pooled together to buy a variety of stocks, bonds, or other securities. This mix of investments is managed by a professional money manager, providing individuals with a portfolio that is structured to match the investment objectives stated in the fund’s prospectus.
F: Historically ETF didn’t exist, so people either had to put money in all stocks to diversity their investments, or give money to mutual funds.
in 2023 Giglio made a survey at Vanguard, asking retail clients to choose from 4 different motives for ESG investment.
1) Financial considerations:
“ESG will outperform”
2) Financial considerations:
“ESG hedges climate risk”
3) Ethical considerations:
“The right thing to do”
4) Do not invest in ESG
investment: “No specific reason”
Data shows that: 45% of clients said that there is no specific reason to invest in ESG. 55% said there are reasons to invest in ESG portfolios. 30% would invest for financial reasons, 25% for ethical reasons (right thing to do)
No fully agreed opinion, it differs
According to Amel Zadeh and Serafeim (2018).
Q: Do you consider ESG information when making investment decisions?
Majority of institutional investors consider ESG for financial reasons
419 people in total
82.1% says yes
1) 63 people say: that ESG information is material to financial performance (the term “material” refers to the significance or importance of environmental, social, and governance (ESG) factors in influencing a company’s financial performance and valuation.)
2) 33 say of growing client/stakeholder demand
3) such policy is effective in bringing change at firms
17.9% no.
1) there is no stakeholder demand for it
2) lack of access to reliable non-financial data
3) ESG data is not material to investment performance
