7th video. Different forms of sustainable investment Flashcards
1st idea: No official classification/taxanomy of implementation appoaches.
One common way of thinking is from asset allocation to engagement scale
Asset allocation:
-negative screening
-positive screening
-norms based screening
-thematic investments
Engagement (based approaches)
-individual engagement
-colaborative engagement
-voting (at shareholder annual meetings)
In between: -esg integration
3 forms of screening? .5
negative/exclusionary
norms-based-screening
positive/best in class screening
screening
restrict the set of investment opportunities according to some predefined set of criteria
(example: for positive screening, only investing in high esg score companies. or excluding certain sector from your portfolio, would be negative screening example)
Negative/exclusionary screening
Avoid securities of companies or countries on the basis of
- moral values (e.g., products or services involving alcohol, tobacco, or gambling)
-standards and norms (e.g., human rights and environmental protection).
Values-based exclusions vs. Norms-based screening .7
-Values-based exclusions: focus on the products of the company; entire sectors can be excluded (e.g., tobacco, alcohol, increasingly coal(fossil fuel)
-Norms-based screening: focus on the company’s behavior regarding internationally accepted norms such as human rights and labor standards (e.g., OECD, ILO, UN, UNICEF)
origins of exclusionary screening? .8
Religious Investing:
- Avoid investments conflicting the religious views of the investor:
17th century:
“[.] the Quakers refused to profit from the weapons and slaves trade when they settled in North America. The founder of Methodism, John Wesley (1703-1791), stated in his sermon ‘The Use of Money’ that people should not engage in sinful trade or profit from exploiting others.”
Controversial business:
Alcohol, gambling, tobacco, adult entertainment, weapons, etc.
- Companies earning greater than 5% of revenues from the manufacture, supply, distribution, or sale of ….
- Companies that own 20 to 49.99% of a company with involvement in manufacture, supply, distribution, or sale of…
Positive (or Best in class) screening .10
- Best-in-class screening: Investing preferentially in companies with better or improving ESG performance relative to sector peers.
- Can be implemented on either
- the level of ESG performance (high sustainability)
- the change in ESG performance (improving sustainability)
- Best-in-class methodology is sometimes referred to as positive screening, selection or positive alignment.
ESG controversies score is based on:
news based, firms that are involved in negative ESG news. such first would be excluded from an index or given a bad grading.
also controversial business activities. (controversial weapons, nuclear power weapons, etc)
- ESG integration
ESG integration: Systematic and explicit inclusion of ESG
risks and opportunities in investment analysis.
* Unlike the best-in-class method, ESG integration does not necessarily require
- peer group benchmarking
- overweighting leaders and underweighting the laggards.
- ex ante criteria for inclusion or exclusion (e.g., high scores, certain business activity, etc.).
Equity =?
Equity = dividends / (equity cost of capital - growth rate of cash flows of a company)
Example 1 - ESG Integration: Valuation of Mining Companies and ESG Risks
Read below and get familiar with an example
- Financial analyst who carries out environmental and social analysis to examine how a mining company manages environmental and social impacts of a mine throughout its life and beyond.
- Use of
- environmental indicators (e.g., the ISO 14001, a family of standards that provide practical tools to manage environmental responsibilities)
- health and safety indicators (e.g., lost production time due to labor injury frequency)
- Effective management of ESG risks can significantly reduce operational risk, resulting in a lower discount rate (cost of equity capital
Example 3 ESG integration. slide 21 -> slide 20
ESG integration strategies
Sustainability is included in the research process in order to enhance risk and retum.
-First (expansion)
ESG integration entails an expansion of the scope of information used in the research process to include environmental, social and governance factors, rather than a limitation of the investment universe.
-Second (enhancement)
ESG integration is fundamentally an enhancement of the underlying research process to take better account of material sustainability risks that can negatively impact financial performance.
-Third (better risk management)
Most fundamentally, integration is driven by a focus on taking better account of material risks and thereby enhancing Investment returns, rather than being driven by ethical principles or norms.
Impact investing (done in private markets)
Impact investing: Investing with the disclosed intention to generate and measure social and environmental benefits alongside a financial return.
- Impact investments: often made in private markets
-Non financial objective - generating positive environmental and social impact
=Financial objective
According to Global Impact Investing Network, the practice of impact investing has three core characteristics:
1)
investors intend to have a social and/or an environmental impact
2)
investments are expected to generate a financial return on capital, and, at a minimum, a retune of capital (i.e., 0% financial return)
3)
investors are committed to measuring and reporting the social and environmental impacts.
private equity investment cycle? .26
overall definition of private equity investment?
Private equity investor does: fund raises money, like GP (general partner), and LP (limited partner, like pension fund) also provides some capital. GP deploys all of that money, invests in private equity. In equity issued by private companies
- sourcing: doing due diligence of finding investable companies
- investment
- exit (example: buying under performing companies, take them private, fire managers / CEO, implement operational changes, and then realise profit through reintroducing into stock market or strategic buyer)
