CAIA L2 - 2.4 - ESG and Alternative Investments Flashcards

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1
Q

State

Growth
of ESG AUM

2.4 - ESG and Alternative Investments

A

2016: $ 206 b
2018: $ 588 b
2017-23 (E) => +60%

2.4 - ESG and Alternative Investments

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2
Q

Contrast

Focus of ESG of
Developed country
vs
Developing country

2.4 - ESG and Alternative Investments

A

environmental issues might be at the forefront for a natural resources fund based in a developed country,
but
governance and social issues might dominate in a real estate fund in a developing country

2.4 - ESG and Alternative Investments

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3
Q

State

4 Main characteristics
of risk-return of firms
that accounts ESG
(high ESG-score companies)

2.4 - ESG and Alternative Investments

A

High ESG-score companies
* Less unsystematic risk
* Lower stock volatility
* Reduced risk of getting in trouble with authorities
* Impact on returns is unclear

2.4 - ESG and Alternative Investments

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4
Q

Identify and explain

Challenges
in incorporating ESG principles
into the investment decision

2.4 - ESG and Alternative Investments

A

Data => Benchmark => Speed
no information => no benchmarking => no evidence of alpha
‘–
Data
Cost of developing industry-standard tools and data sources for alternatives
Benchmark
Lack of standards, techniques, guidances
Speed
Slow adoption by managers, given lack of evidence suggesting that the inclusion of ESG factors will increase returns

2.4 - ESG and Alternative Investments

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5
Q

List

How to avoid price volatility
and
List issues of physical deliveries
(ESG impacts on Commodities)

2.4 - ESG and Alternative Investments

A

ESG impacts commodities
‘–
Avoid causing commodity price volatility
* never take physical delivery
* only trade most liquid contract
* disclosure from managers - demand disclosure of strategies and holdings from managers
* avoid funds that cause vol - avoid funds where trading is likely to cause price volatility
* limit investment in agriculture contracts
‘–
Physical commodity issues
* Hoarding (long position in commodities in short supply / accumulation) for financial benefit
* Some industries have poor treatment of employees (gold/silver)
* Money laundering - production of precious metals / oil in corrupt countries

2.4 - ESG and Alternative Investments

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6
Q

Complete

For agricultural commodities in general, the percentage of contracts held by commercial investors is closest to ____

2.4 - ESG and Alternative Investments

A

50%

The percentage of contracts held by commercial and noncommercial investors is about the same (i.e., 50%)

2.4 - ESG and Alternative Investments

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7
Q

List

3 Best practices
in retrofitting
(ESG impacts on Real Estate)

2.4 - ESG and Alternative Investments

A
  1. considering long-term needs in assessing the extent of renovations required
  2. performing a sensitivity analysis with regard to the amount of refurbishment to balance cost, energy efficiency, and impact on the environment
  3. accounting for changing environmental conditions and the effects of climate change on the land and building.

2.4 - ESG and Alternative Investments

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8
Q

List

Characteristics of
Refurbishing and Demolition
(ESG impacts on Real Estate)

2.4 - ESG and Alternative Investments

A

Refurbishing:
Buildings to be significantly refurbished essentially face the same issues as buildings that are being newly developed (e.g., quality of planning, design, and construction).
‘–
Demolition:
On site preparation of demolition materials - Preparing demolition materials should ideally be done on site.
Materials that are safe to use may release toxic gases, so they are not always safely placed in landfills.
A predemolition audit is primarily designed to minimize the amount of landfill waste and to promote safe handling of dangerous materials.

Assess the situation prior to demolition to reduce landfill waste, and propose proper disposal of hazardous waste.
Reduce the negative impacts on the community regarding such activities.
Determine the risks involved with each demolition step and propose methods of mitigation.
Set in place sufficient insurance and emergency protocols in the event of accidents.
Adhere to regulations pertaining to the disposal of waste; get all relevant permits.
Establish processes to properly treat wastewater and protect groundwater.
Reuse and recycle as much as possible.

2.4 - ESG and Alternative Investments

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9
Q

6 initiatives to reduce carbon emissions (in real estate)
and
5 initiatives to better usage of water (in real estate)
(ESG impacts on Real Estate)

2.4 - ESG and Alternative Investments

A

Carbon emission:
1. Building managers should emphasize energy efficiency and tracking and abide by high standards.
2. Minimize electricity use with efficient lighting and motion controls.
3. Use as many renewable sources of energy as possible (e.g., solar panels, wind turbines).
4. Monitor energy use carefully and use the data to remedy suboptimal energy use.
5. Offer tenants rent reductions for employing energy-efficient tactics.
6. Prominently showcase the building’s success story in reducing energy consumption and its carbon footprint to get buy-in from building users.

Water:
1. Low flow faucets - Water taps/faucets should be low flow.
2. Monitor usage to find leakage - Monitor water usage with controls in place to suggest leaks.
3. Consider reusing water or using other water sources, such as rainwater.
4. Landscaping designs should minimize water usage.
5. Tips to users - Building users should be presented with tips on how to conserve water.

Obs
Polluted water cannot be reused without being properly treated first

2.4 - ESG and Alternative Investments

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10
Q

List

4 Traits of directors
that are desirable
within the fund governing body
(ESG impacts on Hedge Funds)

2.4 - ESG and Alternative Investments

A
  1. Independent directors - primarily directors who are independent of the hedge fund,
  2. sufficiently qualified directors with the requisite background knowledge,
  3. a group of directors who cover a wide range of investors, and
  4. independent directors who could be used to speak for investors whenever a conflict between management and investors arises (e.g., fee changes, investment objective changes).

2.4 - ESG and Alternative Investments

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11
Q

Complete

____ and ____ hedge funds plus hedge funds with quantitative strategies are more likely to consider ESG issues in analyzing underlying investments. (LO 2.4.5)

2.4 - ESG and Alternative Investments

A

Fundamental equity and credit long/short hedge funds plus hedge funds with quantitative strategies are more likely to consider ESG issues in analyzing underlying investments. (LO 2.4.5)

2.4 - ESG and Alternative Investments

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12
Q

Complete

Private equity and hedge funds are expected to comprise more than ____ of ESG assets under management in alternative investments in 2023

2.4 - ESG and Alternative Investments

A

Private equity and hedge funds are expected to comprise more than 2/3 of ESG assets under management in alternative investments in 2023

2.4 - ESG and Alternative Investments

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13
Q

Define

Open Protocol
hedge fund reporting
(ESG impacts on Hedge Funds)

2.4 - ESG and Alternative Investments

A

compromise between
investors’ desires for risk information on hedge funds
and
hedge funds’ desires for confidentiality regarding investing strategies (e.g., asset allocation).

In summary, it provides relevant information in a standardized format at the portfolio level only, so there is an element of safeguarding confidentiality.
There is much standardization surrounding data and inputs, calculations and methods, and reporting periodicity, for example.

2.4 - ESG and Alternative Investments

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14
Q

List

7 recommended information disclosures
of hedge funds

2.4 - ESG and Alternative Investments

A
  1. Liquidity levels
  2. Risk oversight
  3. Valuation methodology (not valuation of the assets)
  4. investment gates
  5. lock-ups
  6. fees
  7. how sustainability risks are considered in the capital allocation process

2.4 - ESG and Alternative Investments

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15
Q

Explain

Why
High-frequency trading (HFT)
is generally inconsistent with ESG
(ESG impacts on Hedge Funds)

2.4 - ESG and Alternative Investments

A

The short-term nature of HFT
is generally inconsistent with ESG strategies,
=> ESG focuses on long-term investing with environmental or sustainability goals.

2.4 - ESG and Alternative Investments

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16
Q

List

10 potential questions
that investors could consider
when assessing ESG features
(ESG impacts on Private Equity)

2.4 - ESG and Alternative Investments

A
  1. ESG policy - Does an ESG policy exist?
  2. ESG group/personDoes a dedicated person or group deal with ESG policy?
  3. Does a Corporate Code of Ethics exist?
  4. Is there current or past litigation?
  5. What is the level of people diversity?
  6. What is the percentage of part-time versus full-time employees?
  7. What environmental policies are followed?
  8. What is the approximate carbon footprint?
  9. Have there been current and past cybersecurity and data events?
  10. Have there been current and past health and safety incidents?
  11. What has been the impact of ESG on the risk and returns of the firm?

2.4 - ESG and Alternative Investments

17
Q

Complete

A worldwide survey of institutional investors found that ____% account for ESG in their investment decisions

In the study, ____% of private equity managers were rated good or excellent.

2.4 - ESG and Alternative Investments

A

A worldwide survey of institutional investors found that 76% account for ESG in their investment decisions

In the study, 58% of private equity managers were rated good or excellent.

2.4 - ESG and Alternative Investments

18
Q

Complete

According to institutional investors, approximately what percentage of their stakeholders have concerns regarding environmental, social, and governance (ESG)?

2.4 - ESG and Alternative Investments

A

69%

2.4 - ESG and Alternative Investments

19
Q

List the environment issues pertaining to investments in natural resources

LO 2.4.2

A
  • Water conservation
  • Biodiversity
  • Soil erosion reduction
  • reduction of greenhouse gas emissions
  • Protection of endangered species
  • Safe chemical usage
  • Proper permits and licensing
  • decommissioning
20
Q

List the social issues pertaining to natural resouces

LO 2.4.2

A
  • Health and safety standards
  • Labour laws and regulations
  • Safety training and certifications
  • Workers rights
  • indigenous people’s rights
  • Respectful engagement with the community
21
Q

List the governance issues pertaining to natural resources

LO 2.4.2

A
  • cooperation with regulators and NGOs
  • industry best practices and sustainability certifications
  • anti-corruption procedures
  • Transparency on asset holdings and ESG criteria
22
Q

List the ESG issues to consider regarding the initial acquisition and development stage of real estate

LO 2.4.4

A
  • Land acquisition and governance
  • Transparency
  • Workers’ rights
  • Environmental stewardship
  • Quality of design, planning and construction
23
Q

ESG issues to consider regarding specific use of real estate

LO 2.4.4

A
  • Transparency and disclosure
  • Environmental stewardship
  • energy consumption
  • Water usage
  • Waste management
24
Q

ESG issues to consider regarding the treatment of tenants, the community and workers

LO 2.4.4

A
  • adopting comprehensive nondiscrimination policies
  • The local sourcing of labor and materials
  • The health, safety and well-being of occupants
  • Workers rights across the supply chain
25
Q

ESG issues to consider regarding real estate recovery and dispsoal

LO 2.4.4

A
  • Strategic site-use evaluation
  • Market conditions
  • Long-term demand for the the existing building or site
  • consider the social and community impact of changing the use of the building
26
Q

ESG issues to consider refurbishment and retrofitting

LO 2.4.4

A
  • Long-term needs
  • Sensitivity analysis to balance the cost, energy efficiency and environment impact
  • Changing environmental conditions
27
Q

ESG issues to consider regarding demolition

LO 2.4.4

A
  • Landfill waste
  • disposal of hazardous waste
  • negative impacts on the community
  • risks and methods of mitigation
  • insurance and emergency protocols
  • regulations
  • the treatment of wastewater
  • protection of groundwater
  • reuse and recycling
28
Q

ESG issues to consider regarding land recovery and rehabilitation

LO 2.4.4

A
  • environmental impact assessments
  • rehabilitation techniques
  • unified planning