Ch 1 Intro ESG

Question 1

What is ESG Investing

Answer 1

Is an approach
To managing assets
Explicitly incorporate E, S G factors in investment decisions with LT return in mind

Question 2

What might ESG Investing impact

Answer 2

Risk, Volatility and LT return of securities and markets
Can have pos and neg impact on society and environment

Question 3

What is corporate social responsibility CSR?

Answer 3

A broad CONCEPT that describes a company’s COMMITMENT to conduct business in an ETHICAL way.

Question 4

What are the three Ps for triple bottom line TPL accounting?

Answer 4

People (social impacts)
Planet (environmental imps)
Profit (traditional focused)

Question 5

Corporate Responsibility

Answer 5

is an APPROACH aiming to CREATE LT stakeholder VALUE through the implementation of a business STRATEGY that focuses on the
ethical, social, environmental, cultural and economic (esece)
dimensions of doing business

An approach of doing business

Question 6

What can effective management of sustainability do?

Effective management of the company’s sustainability can:

Answer 6

• reaffirm the company’s LICENSE to operate in the eyes of governments and civil society;
• increase EFFICIENCY;
• attend to increasing regulatory requirements;
• reduce the probability of fines;
• improve employee satisfaction and productivity;
• and drive innovation and introduce new product lines.

Question 7

What is Responsible Investment?

Answer 7

is an umbrella TERM for the VARIOUS ways in which investors can consider ESG within security selection and portfolio construction.

As such, it may COMBINE financial with non-financial outcomes
and COMPLEMENTS traditional financial analysis and portfolio construction techniques.

Question 8

What are different approaches to ESG investing?

Answer 8

responsible investment;
socially responsible investment (SRI);
sustainable investment;
best-in- class investment;
ethical/values-driven investment;
thematic investment;
impact investment;
green investment;
social investment;
shareholder engagement.

Question 9

Responsible investment

Answer 9

Responsible investment
is a Strategy and Practice to incorporate ESG factors into investment Decisions and active Ownership.

At a minimum, responsible investment consists of mitigating risky ESG practices in order to protect value.

Question 10

What is Socially responsible investment (SRI)?

Answer 10

Socially responsible investment (SRI) refers to
approaches that apply social and environmental criteria in evaluating companies.

generally score companies using a chosen set of criteria, usually in conjunction with sector-specific weightings.
A hurdle is established for qualification within the investment universe, based either on the full universe or sector-by-sector. This information serves as a first screen to create a list of SRI qualified companies.

Question 11

What is Best-in-class investment?

Answer 11

Best-in-class investment involves Selecting only the companies that overcome a Defined Ranking Hurdle, established using ESG criteria within each sector or industry.

▶ Typically, companies are scored on a variety of factors that are weighted according to the sector.
▶ The portfolio is then assembled from the list of qualified companies.

Question 12

What is Sustainable investment?

Answer 12

Sustainable investment
Selection of assets that contribute in some way to a sustainable economy,
i.e. an asset that minimizes natural and social resource depletion.
▶ It is a broad term, with a broad range of interpretations that may be used for the consideration of typical ESG
issues.
▶ It may include best-in-class and/or ESG integration, which considers how ESG issues impact a security’s risk
and return profile.
▶ It is further used to describe companies with positive impact or companies that will benefit from sustainable
macro-trends.

Question 13

What is Thematic investment?

Answer 13

Thematic investment
Selecting companies that fall under a sustainability-related Theme, such as clean-tech, sustainable agriculture, healthcare or climate change mitigation.

not all thematic funds are considered to be responsible investments or best-in-class

Question 14

What is Green investment?

Answer 14

Green investment refers to
Allocating capital to assets that mitigate:
▶ climate change; ▶ biodiversity loss;
▶ resource inefficiency; and
▶ other environmental challenges.

These can include:
▶ low-carbon power generation and vehicles;
▶ smart grids; ▶ energy effciency;
▶ pollution control; ▶ recycling;
▶ waste management and waste of energy; and
▶ other technologies and processes that contribute to solving particular environmental problems.

Question 15

What is Social investment?

Answer 15

Social investment refers to
allocating capital to assets that address Social Challenges.

can be products that address the bottom of the pyramid (BOP)

▶ micro-finance and micro-insurance;
▶ access to basic telecommunication;
▶ access to improved nutrition and healthcare; and
▶ access to (clean) energy

Question 16

What is Impact investing?

Answer 16

Impact investing refers to investments made with the Specific Intent of generating positive, measurable social
and/or environmental impact alongside a financial return (which differentiates it from philanthropy).

▶ offer access to basic services, including housing, healthcare and education;
▶ promote availability of low-carbon energy;
▶ support minority-owned businesses; and
▶ conserve natural resources.

Question 17

What is Ethical (also known as value-driven) and faith-based investment?

Answer 17

Ethical and faith-based investment refers to Investing in line with certain Principles, often using negative screening to avoid investing in companies whose products and services are deemed morally Objectionable by the investor or certain religions, international declarations, conventions and
voluntary agreements.

Typical exclusions include:
▶ tobacco; ▶ alcohol; ▶ pornography; ▶ weapons;
▶ nuclear power; and ▶ significant breach of agreements, such as the Universal Declaration of Human Rights or the International Labour Organization (ILO)’s Declaration on Fundamental Principles and Rights at Work.

Question 18

Christian values investing

Answer 18

Christian
Investors wishing to put their money to work in a manner consistent with Christian values seek to avoid
investing in firms that:
▶ facilitate abortion, contraceptives or embryonic stem-cell research; or
▶ are involved in the production and sales of weapons.

Question 19

Shariah or Islamic values investing

Answer 19

Shariah
Investors seeking to follow Islamic religious principles cannot:
▶ invest in firms that profit from alcohol, pornography or gambling;
▶ invest in companies that carry heavy debt loans (and therefore pay interest);
▶ own investments that pay interest;
▶ liaise with firms that earn a substantial part of their revenue from interest; and
▶ invest in pork-related businesses

Question 20

What is Shareholder engagement?

Answer 20

Shareholder engagement reflects Active Ownership by investors in which the investor seeks to Influence
a corporation’s Decisions on matters of ESG, either through Dialogue with corporate officers or
Votes at a shareholder assembly (in the case of equity).

Question 21

3. In what sense are ESG considerations non-financial?
   (a) They are difficult to value precisely and difficult to time.
   (b) They are issues that will never turn into financials.
   (c) They sit in a different category of performance.
   (d) They can only ever be measured qualitatively

Answer 21

(a) They are difficult to value precisely and difficult to time.

Question 22

5. Which of the following is not a typical method by which ESG is reflected in investment
   approaches?
   (a) Integrating ESG into investment decision-making.
   (b) Engaging actively with companies on ESG matters.
   (c) Engaging in public policy debates on ESG issues.
   (d) Disclosing the investor’s corporate social responsibility activities.

Answer 22

(d) Disclosing the investor’s corporate social responsibility activities.

Question 23

7. What are the four broad groupings of issues covered by the UN Global Compact?
   (a) Environmental, social, governance and impact.
   (b) Human rights, labour, environment and anti-corruption.
   (c) Poverty, diversity, sustainability and transparency.
   (d) Education, development, fairness and independence.

Answer 23

(b) Human rights, labour, environment and anti-corruption.

Question 24

11. The efficiency of shareholder engagement does NOT depend on…
    (a) …the scale of ownership of the individual investor or the collective initiative.
    (b) …the quality of the engagement dialogue and method used.
    (c) …whether divestment is known to be a possible sanction.
    (d) …the amount of security in free float.

Answer 24

(d) …the amount of security in free float.

Question 25

13. What kinds of situations does the term ‘negative externality’ best describe?
    (a) Situations where the production of goods induces costs to others that are not reflected in the prices charged for them.
    (b) Situations where the consumption of services induces benefits to others that are not reflected in the prices charged for them.
    (c) Situations where the production or consumption of a product or service’s private price equilibrium cannot reflect the true costs of that product or service for society as a whole.
    (d) Situations where the production or consumption of a product or service’s private price equilibrium cannot reflect the true benefits of that product or service for society as a whole.

Answer 25

(c) Situations where the production or consumption of a product or service’s private price equilibrium cannot reflect the true costs of that product or service for society as a whole.

Question 26

15. What is the most probable reason why an investor would engage with policy makers on ESG?
    (a) The consideration of ESG-related matters can contribute to the proper functioning of the financial markets.
    (b) Asset owners need regulators to level the playing field in order to be able to increase their percentage of ESG investments.
    (c) Policy consultations on ESG investing are mandatory in order to ensure that all perspectives are taken into consideration.
    (d) ESG investors require a sound and stable financial system in order to make alpha from ESG megatrends.

Answer 26

(a) The consideration of ESG-related matters can contribute to the proper functioning of the financial markets.

Question 27

What is externalities?

Answer 27

The term externalities refers to situations where the production or consumption of goods and services creates costs or benefits to others that are not reflected in the prices charged for them.
In other words, externalities include the consumption, production and investment decisions of firms (and individuals) that affect people not directly involved in the transactions.

Externalities can either be negative or positive

Question 28

What 4 areas do the ten principles of the UNGC cover?

Answer 28

United Nations Global Compact

Chief amongst the supranational initiatives, the United Nations Global Compact (UNGC) was launched in 2000 as a collaboration between leading companies and the UN. It has since gained remarkable traction and now claims to be the largest corporate sustainability initiative in the world with over 8,000 corporate signatories spanning the globe. These signatories agree to adhere to the ten principles, derived from broader global standards such as the Universal Declaration of Human Rights and the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work.
The ten principles of the UNGC cover the areas of
human rights, labor, environment and anti-corruption. HumanEnviAnti-corLabor
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It has provided investors with a helpful set of principles to assess and engage with companies, as well as directly aided companies in becoming more sustainable.

Question 29

What is Principles for Responsible Investment (PRI)?

What are 6 principles for PRI?

Answer 29

The PRI comprises a UN-supported international network of investors – signatories, working together towards a common goal to understand the implications of ESG to investment and ownership decisions and ownership practices.

The PRI developed six principles, which are voluntary, but provide overarching guidance on actions members can take to incorporating ESG issues into investment practice. The six principles are:

1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the principles.
6. We will each report on our activities and progress towards implementing the principles.

Question 30

Walker Report

the Financial Reporting Council (FRC) to issue a stewardship code

Answer 30

Regulatory interest in stewardship has grown from the disappointment of that financial crisis. As an adjunct to the institutional investor soul-searching that followed the crisis,

the Walker Report ushered in a new era of shareholder engagement.

The report formally called for

the Financial Reporting Council (FRC) to issue a stewardship code to provide a framework for shareholder engagement, and that this code was to be reinforced by a Financial Services Authority (FSA – now the Financial Conduct Authority (FCA)) requirement that any registered fund manager must make a statement as to whether and how it approached its principles.