2.4 ESG in Alts Flashcards
ESG AUM in 2016 and 2018 ($)? What is the projected % growth between 2017 and 2023.
ESG assets under management (AUM) grew from about $206 billion to $588 billion between 2016 and 2018.
The projection is for a 60% growth between 2017 and 2023, primarily in private equity and hedge funds.
What % of institutional investors around the world admitted to accounting for ESG factors in choosing investments? What are the two reasons for this?
About 75% of global institutional investors consider ESG factors. This is for maintenance of reputation and higher risk-adjusted returns
There is support to suggest that companies that score well on ESG…
But there is less support to suggest that ….
There is support to suggest that companies that score well on ESG have less unsystematic risk in the sense that their operational risk is lowered when putting controls in place to prevent environmental damage.
But there is less support to suggest that high ESG scores lead to higher returns
Firms that handle ESG issues properly should see less ____ and less risk of ____
Less stock price volatility and less risk of getting in trouble with the authorities.
Despite growing requests by institutional investors for the integration of ESG in their investments, many managers have been reluctant to do so - why?
The lack of evidence suggesting that the inclusion of ESG factors will increase returns. But - as evidence grows to support higher risk-adjusted returns and lower reputation risk, likely see more managers integrating
What are some challenges with ESG:
1. manager reluctance
2. guidelines
3. benchmarks
4. public/private
5. skillset
- managers are reluctant given lack of evidence that ESG increases returns
- lack of guidelines on how to include ESG considerations in investing
- availability of only a few appropriate benchmarks
- any guidance tends to be focused mainly on investments in public companies - not much for real estate or private equity
- ESG analysis skillset needs to be developed over time
Environmental issues in natural resources - risks/issues and mitigants.
1. w____
2. p___/a____life (including ES)
3. s_____
4. GHG
5. c/p____
Projects should have ___ and a ____
- water - mining and farming use and pollute a lot of water. Better to use least amount necessary and allow for proper remediation, removal, or safe storage of hazardous waste
- plant/animal life (including endangered species) - should preserve and avoid disruption
- soil - access roads, drainage mechanisms, erosion minimization
- greenhouse gas (methane etc). Need monitoring and use of fossil fuel equipment
- chemicals and pesticides - must not use those that stay in the food chain, and properly store and dispose of.
Projects should have required permits and a proper decommissioning plan
Social issues in natural resources - risks/issues and mitigants.
- H+S
- LL
- T
- allow U/CBA, prevent CA
- projects are often near ____ so should ___
- think of the wider ___
- health and safety standards
- labor laws - pay on time and proper amounts etc
- proper training for workers - should be continuous and with proper controls
- allow for unions and collective bargaining activities, prevent criminal activity e.g. child labour
- projects are often near indigenous populations and cultural sites, so must recognize their rights and avoid harm
- think of wider community
Governance issues in natural resources - risks/issues and mitigants.
1. R/NGOs
2. demonstrate and obtain___
3. implement ___ and adhere to ___
4. provide investors with ____
- work with regulators and nongovernmental organizations - sharing research and info on site visits
- demonstrate industry best practices and obtain sustainability certifications (e.g., USDA certified organic farming)
- implement anti corruption measures and adhere to laws
- provide investors with periodic reporting on financial position or performance, ESG risks, and strategies
Participation in agricultural commodity derivatives is by _____ and ____ (%). How does this compare to non agricultural commodities?
Commercial investors (e.g., those who produce or use the commodity)
and
noncommercial investors (e.g., speculators such as hedge funds and retail investors)
For agri, it is roughly equally split between the two.
For nonagri - it is most speculators who transact in the futures.
What is the negative impact of speculators on commodities? (farmers)
It causes increased commodities price volatility, which impacts food prices. As the most vulnerable economies are dependent on agriculture, this can mean local farmers suffer from low prices for their products during the lows, and importing food may be prohibitively expensive during the highs
To avoid the negative impacts caused by speculation in commodity futures, ESG investors should:
1. physical
2. invest in
3. obtain
4. avoid
5. reduce
The drawbacks for investors in doing the above are reduced ___ and reduced ____
- avoid taking physical delivery of the commodity to avoid creating supply and demand mismatches
- invest in liquid contracts with high price volatility
- attempt to obtain hedge fund’s commodity futures holdings and trading strategies
- avoid funds with strategies than promote price volatility
- reduce investments in agri contracts in smaller/more illiquid markets
The drawbacks for investors in doing the above are reduced market efficiency and reduced returns
What is hoarding behaviour in physical commodities? What is the result?
Hoarding behaviour may occur by taking long positions of commodities in short supply to try to earn profits.
The combination of high demand and low supply caused by hoarding could result in high prices and shortages that can harm some countries and industries
What is a significant risk with direct ownership of precious metals and oil? Why these commodities in particular?
Money laundering. These commodities are often produced in emerging countries that are often corrupt and open up easy opportunities for money laundering.
What are two options for ESG investors looking to avoid challenges when investing in physical commodities?
1. directly
2. work with
- invest in natural resources directly where they are produced in order to have more control and to ensure ethical operations
- make investments in mining or commodity firms and work directly with management regarding ESG policies
