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ESG Certificate > Chapter 1 - Intro to ESG Investing > Flashcards

Chapter 1 - Intro to ESG Investing Flashcards

1
Q

Explain Short Termism

A

Short-term stratgies based on short-term price movements.
May have adverse long-term consequences. May mean companies are less willing to make long-term changes or take on projects to change (such as ESG).
Short termism can create bubbles, financial instability, and general economic underperformance.

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2
Q

Define ESG definition and scope

A

No universal standard for what could be covered under ‘E’ ‘S’ or ‘G’. The definitions may overlap each other.

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3
Q

What is a stakeholder?

A

Members or groups of people without whose support an organisation would cease to exist.

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4
Q

What is the ‘Triple Bottom Line’?

A

An accounting framework with three parts: social, environmental (or ecological) and financial (people, planet, profit)
Evolved from a holistic approach to sustainability.

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5
Q

Define Responsible Investment

A

Strategy and practice to incorporate ESG factors into investment decisions and active ownership.
At a minimum, it consists of mitigating risky ESG practices to protect value.
It encompasses how ESG factors might influence risk adjusted returns of an asset, the stability of an economy, and how investing in this can impact society and the environment.
All forms of responsible investment (except for engagement) are ultimately related to portfolio construction.

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6
Q

Define Socially Responsible Investment

A

Approaches that apply social and environmental criteria in evaluating companies. Implementing SRI usually means scoring companies with a set criteria, usually with sector specific weightings.
A hurdle is established for qualification within the investment universe.

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7
Q

Define Best In Class Investment

A

The selection of companies that overcome a defined ranking hurdle- established using ESG criteria within each sector or industry.
Not all best in class are considered ‘responsible’.
Usually used when trying to maintain certain characteristics of an index.
Eg MSCI world SRI Index similar but not identical to MSCI World Index.

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8
Q

Define Sustainable Investment

A

A selection of assets that contribute to a sustainable economy.
Can include Best in Class or ESG integration.
Can also be a term used for investment that screens out activities contrary to long-term environmental or social sustainability. Such as mining, burning coal, or exploring for oil in the Arctic.

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9
Q

Define Thematic Investment

A

Selecting companies that fall under a sustainability related theme. Such as clean tech, sustainable agriculture etc.
Two common themes are low carbon energy and access and the efficient use of water.
Not all thematic funds are considered responsible or best in class.

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10
Q

Define Green Investment

A

Allocating capital to assets that mitigate climate change, biodiversity loss, resource inefficiency, other challenges.
Can include low carbon power, smart grids, pollution control, recycling, energy efficiency, waste management and waste of energy, other tech

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11
Q

Define Social Investment

A

Allocating capital to assets that address social challenges.
These can be products that address the bottom of the pyramid (BOP).

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12
Q

What is the bottom of the pyramid (BOP)

A

Refers to the poorest two-thirds of the economic human pyramid.
A group of 4 billion people living in poverty.
BOP refers to a market based model of economic development that seeks to alleviate poverty whilst providing growth and profit for businesses serving these communities.

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13
Q

What is Best in class investment

A

Selecting companies that overcome a defined ranking hurdle, which is established using ESG criteria within each sector or industry.
Not all best in class are considered responsible investments.

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14
Q

What is impact investment

A

Refers to investments made with the specific intent of generating positive, measurable social or environmental impact alongside a financial return.
Usually associated with direct investments (private debt, private equity and real estate).

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15
Q

What is GIIN

A

Global Impact Investing Network

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16
Q

What does modern fiduciary duty require investors to do?

A

Incorporate financially material ESG factors into their investment decision making.
Understand and incorporate the sustainability preferences of beneficiaries.
Be active owners
Support the stability and resilience of the financial system.
Disclose investment approach clearly, explaining how preferences are incorporated into the schemes investment approach.

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17
Q

What will negative megatrends do?

A

Create a drag on economic prosperity, as basic inputs become scarce and expensive. Health and income inequalities will increase within countries and the global north and south.

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18
Q

What is the Financial Stability Board?

A

Promotes international financial stability. It coordinates national financial authorities and international standard setting bodies.

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19
Q

What are the nine planetary boundaries?

A

Climate change
Freshwater change
Ozone depletion
Atmospheric aerosol loading
Ocean acidification
Biogeochemical flows
Novel entities
Land system change
Biosphere integrity

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20
Q

Which planetary boundaries have been crossed?

A

Climate change
Loss of biosphere integrity
Land system change
Freshwater change
Novel entities
Altered biochemical cycles

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21
Q

Explain the regulatory perspective on ESG

A

Since the 1990s, responsible investment regulation has increased significantly. A surge in policy interventions since 2008 crisis.
Change has also been driven by realisation that the financial sector can play an important role in meeting global challenges, such as combating climate change, modern slavery and tax avoidance.

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22
Q

Why can ESG investment reduce risk and enhance returns?

A

Because it considers the additional risks and injects new forward looking insight into the investment process.

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23
Q

What are the four widely recognised megatrends?

A

Emerging markets and urbanisation
Technological Innovation
Demographic Changes and wealth inequality
Climate Change and resource scarcity

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24
Q

What is dynamic materiality?

A

What is financially material to a company not only can, but is likely to change.

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25
Q

What is financial materiality?

A

Factors that directly influence a company’s performance.

26
Q

What is the Task Force on Climate Related Financial Disclosures (TCFD)

A

Part of the Financial stability board. Developed to establish and recommend a framework for identifying, assessing and reporting climate related financial disclosure. Focuses on:
Governance
Strategy
Risk management
Metrics and targets

27
Q

What is the Triple Bottom Line? TBL or 3BL

A

An accounting framework with three parts: social, environmental (or ecological) and financial (people, planet, profit)

28
Q

What is the United Nations Environment Programme Finance Initiative (UNEP FI)

A

Partnership between UNEP and the global finance sector to mobilise private sector finance for sustainable development.

29
Q

What is the United Nations Framework Convention on Climate Change (UNFCCC)

A

International treaty adopted in 1992 to stabilise greenhouse gasses in the atmosphere that would prevent dangerous man made interference with the climate system.
Also the name of the UN secretariat based in Bonn, Germany, that has the responsibility to support the operation of the treaty.

30
Q

What is the United Nations Global Compact? (UNGC)

A

Launched in 2000. A collaboration between leading companies and the United Nations. 8000 corporate signatories globally.
Signatories agree to adhere to 10 principles, derived from broader global standards.
Provides investors with a helpful set of principles to assess and engage with companies as well as directly aid companies in being more sustainable.

31
Q

What is traditional philanthropic investing

A

Focusing on societal changes through provision of grants

32
Q

What is venture philanthropic investing

A

Addressing societal challenges with venture investment process. Social return focussed

33
Q

What is venture philanthropic investing

A

Addressing societal challenges with venture investment process. Social return focussed

34
Q

What is social investing

A

Investments with a focus on social and / or environmental outcomes and some expected financial return. Social return expected and sub market financial rate.

35
Q

What is social investing

A

Investments with a focus on social and / or environmental outcomes and some expected financial return. Social return expected and sub market financial rate.

36
Q

What is impact investing

A

Investments with an intent to have a social and /or environmental return as well as financial return. Social return and financial market rate return

37
Q

What is impact investing

A

Investments with an intent to have a social and /or environmental return as well as financial return. Social return and financial market rate return

38
Q

What is sustainable and responsible investing?

A

Adapting environmental, social and governance practices to enhance value or mitigate practices in order to protect value. Financial market rate return focused.

39
Q

What is sustainable and responsible investing?

A

Adapting environmental, social and governance practices to enhance value or mitigate practices in order to protect value. Financial market rate return focused.

40
Q

What are fully commercial companies/ investors?

A

Limited or no regard for social or environmental governance practices. Financial market return focus only.

41
Q

Explain a reason ESG integration is good for investors

A

ESG factors can reduce risk and enhance returns because it considers additional risks and injects new and forward looking insights into the investment process.

42
Q

What does the term ‘externalities’ refer to?

A

Situation where to production or consumption of goods and services creates costs or benefits to others that are not reflected in the price charged for them. Externalities can be positive or negative

43
Q

What happens when externalities are negative?

A

Private costs are lower than societal costs, resulting in market outcomes that may be efficient, or in other words, leading to market failures through excessive consumption of a good or service.

44
Q

What is internalisation?

A

All measures to ensure that externalities become reflected in the prices of commercial goods and services.

45
Q

What are the 4 widely recognised megatrends

A

Emerging markets and urbanisation, tech innovation, demographic changes and wealth inequality, climate change and resource scarcity.

46
Q

What is double materiality?

A

ESG Materiality is a risk that could affect a company, double materiality is the reverse as well, the effect a company can have on the environment.

47
Q

How many initiatives does the United Nations (UN) have that are of particular interest to investors?

A

Three:
UN Global Compact (UNGC)
UN Environment Programme Finance Initiative (UNEP)
Principles for Responsible Investment (PRI)

48
Q

How many initiatives does the United Nations (UN) have that are of particular interest to investors?

A

Three:
UN Global Compact (UNGC)
UN Environment Programme Finance Initiative (UNEP)
Principles for Responsible Investment (PRI)

49
Q

What is the UNGC and what do they do?

A

Launched in 2000 as a collaboration between leading companies in the UN.
Claims to be the largest corporate sustainability initiative in the world.
8,000 signatories spanning the globe.
Signatories have to adhere to 10 principles.
The Principles derive from broader global standards, covering human rights, labour, environment and anti-corruption.
It has provided investors with a helpful set of principles to assess and engage with companies. As well as aided companies to become more sustainable.

50
Q

What is the UNGC and what do they do?

A

Launched in 2000 as a collaboration between leading companies in the UN.
Claims to be the largest corporate sustainability initiative in the world.
8,000 signatories spanning the globe.
Signatories have to adhere to 10 principles.
The Principles derive from broader global standards, covering human rights, labour, environment and anti-corruption.
It has provided investors with a helpful set of principles to assess and engage with companies. As well as aided companies to become more sustainable.

51
Q

What is the UNEP FI

A

A partnership between UNEP and the global financial sector to mobilise the private sector finance for sustainable development.
UN Environment Programme Finance Initiative
300 members (banks, investors and insurers)

52
Q

What is the PRI?

A

Principles for Responsible Investment
UN supported international network of investors/signatories. They work together toward understanding the implications of ESG factors for investment and ownership decisions and ownership practices.
6 voluntary principles

53
Q

Why is the PRI important?

A

For some being a member is a badge for being a responsible investor.
Members must report annually on their responsible practices, which are assessed by the PRI.
The report is public but the assessment is private to the member.
Initially, despite assessment, there were no minimum requirements to be a member other than pay fees. Now PRI has implemented minimum requirements.

54
Q

What is the UNFCCC

A

UN framework convention on Climate Change.
Launched in 1992 with aims to stabilise GHG emissions to limit man made climate change.
Hosts an annual conference of the parties (COP) which advance member states voluntary agreements to limiting climate change.

55
Q

What is the Kyoto Protocol?

A

Launched in 1997. Commits industrialised countries to limit and reduce their GHG emissions in accordance with agreed individual targets.

56
Q

What is the Kyoto Protocol?

A

Launched in 1997. Commits industrialised countries to limit and reduce their GHG emissions in accordance with agreed individual targets.

57
Q

What was important about COP21 in Paris?

A

Led to the Paris Agreement. Commits developed and emerging economies to strengthen the response to the threat of climate change by keeping the global temperature rise this century well below 2C (3.6F) above pre-industrial levels.

58
Q

What is an investment tilt?

A

Investing the portfolio towards a desired characteristic by over or under-weighting sectors or companies that perform either well or poorly in that category.
Involves straying from benchmarks, increasing tracking error.

59
Q

What is tracking error?

A

The difference between the performance of an investment and its benchmark

60
Q

What are some risks and opportunities in ESG investing for investors?

A

Data availability: difficult with asset classes other than equity. Limited by corporate disclosures. Limited to if investor understanding of data and which metrics are financially material.
Modelling: challenging to integrate in traditional financial models as they do not always have a short term impact. Mostly focus on risk and fewer tools for assessing positive impact.
Valuation techniques: question of how much discount should apply for ESG risks.

ESG Certificate (2 decks)

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