9th video: problem set analyze Flashcards
What is a sustainable investment / strategy?
“a sustainable investment means an investment in an economic activity that contributes to an environmental objective or [.] to a social objective [.]. provided that such investments Do Not Significantly Harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.”
!!!-A sustainable investment strategy is an approach to investing that takes into account environmental, social, and governance concerns. It is designed to generate positive financial returns and promote positive social and environmental impacts.
These strategies are designed to benefit both investors and the environment by addressing the social and environmental issues that have a direct impact on financial performance.
Long term oriented financial decision making. Integrates environmental, social, and governance issues or other sustainability considerations. Balance positive financial return and positive social and environmental impacts.
5 main sustainable investment approaches?
(one of the most important slides in the course)
- Screening. Restricting the set of investment opportunities according to some predefined set of criteria.
It can be: negative/exclusionary screening. Value based exclusions (product of the company.) Positive/best in class screening. Norms-based screening (behaviour of the company) - ESG integration. Systematic and explicit inclusion of ESG risks and opportunities in investment analysis.
- Impact/community investing: investing with an intention to generate and measure social and environmental benefits alongside a financial return.
- Sustainability themed investing: addresses specific sustainability issues and themes.
- Corporate engagement, shareholder action, or active ownership. engage with companies to change corporate policies
Describe the client profile 10 most important investment aspects:
Important!
1.
Financial objective: (stable returns, increase value, preserving wealth, saving for retirement, buying a home, funding education etc.)
→ sustainability-oriented investors may accept slightly lower returns for better alignment with their ethical and sustainable principles
2.
Non-financial objective: i.e. align investment with their morals, values, focusing on ESG (Environmental, Social, and Governance) factors → sustainability-oriented investors may differ dramatically in their ethical and sustainable principles
3.
Risk tolerance/capacity: ability and willingness to withstand fluctuations in the value of their investments and financial capacity to bear risk → some (institutional) investors use ESG as a tool for risk management, address ESG-related
4.
Investment horizon: The time an investor plans to hold their investments (Short-term vs. long-term investors) → Sustainable investment is often long term, as sustainability goals may require sustained commitment
- Monitoring and rebalancing preferences: Knowing how often an investor wants to review and rebalance their portfolio. → Si may want to rebalance more frequently when a scandal or “greenwashing” occurs and monitor the non-financial performance
6.
Liquidity needs: Investor need to access their funds during investment. → Sl may need to be more patient with illiquid investments that offer long-term sustainability benefits
7.
Income requirements: The need and frequency to generate income form investment. → Sl may prefer investments with sustainable income rather than frequent
- Tax considerations: Tax implications and consequences from investment strategy.
→ Sustainability-oriented investors need to weight tax-efficient sustainable investment strategies against donation and charity
9.
Financial literacy and (sustainable) investment experience: The level of an investor’s knowledge and experience with investments
→ Even experienced investors may struggle with the concepts of sustainable investing and prefer a simpler approach with less risk for “greenwashing”
10.
Diversification/ investment constraints : Investor preference and need for diversified portfolio or specific asset classes and regulatory, capital, and liquidity constraints.
→ SI may focus on sustainable investment sectors, assets or
What are the advantages and disadvantages of strategies?
Important!!!
Advantage
Disadvantage
—Screening
Advantage:
* Relatively easy to implement
* Flexible screening criteria
Disadvantage:
* Low impact or potential to change company (Exit vs. Voice)
* Prone to greenwashing, data manipulation
—Negative Screening
Advantage
* Reduces exposure to controversial or harmful industries
Disadvantage:
* Limits diversification and investment opportunities
—Positive Screening
Advantage
* Supports companies with ethical or sustainable criteria
Disadvantage:
* Potential for missed financial opportunities
—Value-Based Screening (products of the company)
Advantage:
* Aligns investments with specific personal or organizational values
Disadvantage:
* Value-based criteria a may be subjective and vary
among investors (e.g. nuclear energy)
—Norm-Based Screening (behavior of the company) Advantage
* Aligns investments with widely accepted ethical or norm-based standards norms such as human rights and labor standards
Disadvantage
* May not capture all relevant ethical or sustainability issues (eg. tobacco industry)
—ESG Integration
Advantage:
* Holistic investment approach that integrates
ESG factors into investment decision-making
* Great risk management potential
* Aligns both financial and sustainability goals
Disadvantage:
* Can be complex and challenging to quantify ESG
impacts
* May require extensive monitoring and
—Impact/community investing
Advantages:
* Investment in measurable and positive impact
* Clearly defined business model
Disadvantages
* Often private companies with less information
* Young companies like start-ups with high risk
—Sustainability themed investing
Advantage:
* Clearly defined area and support of specific sustainability themes (e.g., renewable energy, water)
Disadvantage:
* Concentrated exposure to specific themes
* May lead to riskier portfolios
—Corporate engagement or active ownership
Advantage:
* Influence ESG practices within portfolio companies
* Allows to invest in all industries i.e. in companies with greatest potential for change
Disadvantage
* Requires significant resources and expertise
* May involve complex engagement and proxy voting
Pension fund: financial goals / risk tolerance / investment time horizon / liquidity needs / tax considerations / diversification and investment constraints / potential strategy
EXAMPLE I: PENSION FUND
* Financial goals: Ensure that future pension obligations to retirees
preserving and growing the fund’s assets over the long term while generating sufficient returns to pay out pensions.
* Risk tolerance: Moderate risk tolerance
* Limited risk to the need to meet their long-term obligations
* Investment time horizon: Very long investment time horizon
* Must plan for pension payouts over many decades.
* Liquidity needs: Typically low
* Don’t need to access their investments frequently
* Tax considerations: Highly relevant
* Need to invest tax-efficiently and justify investment strategy
* Diversification/ investment constraints : Crucial
* Need to diversify investment to ensure future obligations
* Face extensive regulatory constraints
—Potential strategy
* Active ownership → long-term investor, low risk profile, established companies with potential to change not only green companies
* ESG integration → Identify ESG risk and opportunities that materialize in long-term
Wealthy private investor: financial goals / risk tolerance / investment time horizon / liquidity needs / income requirements / tax considerations / diversification / potential strategy
EXAMPLE I I:WEALTHY PRIVATE INVESTOR (HNW)
* Financial goals: Range of financial goals like wealth preservation, capital growth, legacy planning and income generation
* Risk tolerance: Moderate to high, depending on individual preferences and circumstances (lifecycle)
* Investment time horizon: Varies with goals but can be long-term (legacy planning)
* Liquidity needs: May require more liquidity for lifestyle expenses or business investments
* Income requirements: May rely on investments to supplement their income
* Tax considerations: Often have complex tax considerations and seek tax-efficient strategies
* Diversification preferences/ investment constraints: Diversification can be achieved by investing in different assets classes next to income and real estate. Capital constraints are less of an issue as regulatory constraints and risk management
—Potential strategy:
* Screening → Customized alignment of investments with values and norm
- Sustainability themed investment Personalized clearly defined area and support of specific sustainability themes
Private equity: financial goals / risk tolerance / investment time horizon / liquidity needs / income requirements / tax considerations / diversification / potential strategy
EXAMPLE I I I: PRIVATE EQUITY
Financial goals: Generate substantial returns by investing in private companies
* Buy, grow, and eventually sell at a profit.
* Risk tolerance: High risk
* Young, start-up companies
* Limited public information
* Investment time horizon: Middle to long-term horizon
* Investments often spanning several years
* Liquidity needs: Highly illiquid, long holding period
* Income requirements: Not primary consideration
* Returns are often generated through capital gains
* Tax considerations: Essential considerations in private equity deals
* Diversification/investment constraints: Limited diversification and significant capital constraints
* Often concentrated stakes in individual companies
Investments require substantial funds
—Potential strategy
* Impact investing → Expertise allows them identify companies with greatest potential and high risk tolerance and low liquidity need allows to bear high investment risk while growing companies
Summary:
SUMMARY
* A sustainable investment strategy considers long-term financial decision-making
It balances financial return and sustainability aspects
* Approaches can vary in complexity, implementation effort, risk profile and degree of sustainability integration (impact)
* To select an appropriate strategy, you need to understand the client profile
- You should know the advantages and disadvantages of each strategy
* Define the success of the strategy and what data you need to implement and measure it
