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CFA ESG Investment > Chapter 1: Introduction to ESG > Flashcards

Chapter 1: Introduction to ESG Flashcards

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CFA flashcards
1
Q

Define ESG Investing?

A

Asset managment approach that acknowledges importance of ESG in

  • investment decisions
  • own role as owners
  • own roal as creditors
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2
Q

Impact of ESG?

A
  • Risk
  • Volatility
  • Long-term return
  • Individual securities and market
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3
Q

Define Corporate Social Responsibility?

A

Broad concept that companies want to act in an ethical way.

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4
Q

What is tripple P accounting

A
  • People
  • Planet
  • Profit
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5
Q

What is Responsible investment?

A
  • Strategy and practice
  • Integrate ESG into investment decisions
  • Stewardship
  • Considers how ESG factors impacts the risk-adjusted return of an asses and the stability of the economy
  • ESG are taken into account to mitigate risk and focus on financial return
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6
Q

What are the main responsible investment strategies?

A
  1. Best-in class investing
  2. Socially responsible investing
  3. Sustainable investing
  4. Thematic investing
  5. Green investing
  6. Social investment
  7. Impact investment
  8. Ethical and Faith based investing
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7
Q

What is Best-in class Investment? (criteria, selection, diversification, tracking error, screening)

A
  • Selecting a company that passes a pre-defined ranking hurdle and ESG criteria within sector and industry.
  • used in investment strategies that try to keep characteristics of an index and maintain regional or sectoral diversification.
  • Low tracking error
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8
Q

What is Socially responsible investment? (criteria, selection, diversification, tracking error, screening)

A
  • Applies social and environment factors in evaluating companies
  • Investors score companies using criteria, usually in conjunction with sector-specific weighting
  • Set hurdle for investable universe which serves as a screening for qualitied companies
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9
Q

What is Sustainable Investment? (criteria, selection, diversification, tracking error, screening)

A
  • investment strategy that wants to contribute to sustainable economy and minimize resource depletion
  • Could include best in class
  • Could also mean investing in companies that have a positive impact.
  • Screening
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10
Q

What is Thematic Investment? (criteria, selection, diversification, tracking error, screening)

A
  • Selecting companies that fall under sustainable-theme, such as cleantech
  • not all thematic investment are considered responsible investment
  • Because companies may not comply with other ESG characteristics
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11
Q

What is Green Investment? (criteria, selection, diversification, tracking error, screening)

A
  • Broad subcategory of thematic investment
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12
Q

What is Social Investment? (criteria, selection, diversification, tracking error, screening)

A
  • Adresses bottom-of-the-period.
  • Is a market-based instrument of economic development and poverty eliviation and
  • includes invesmtments in micro-finance.
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13
Q

What is Impact Investment? (criteria, selection, diversification, tracking error, screening)

A
  • Investment made with specific ESG impact and financial return (unlike philantrophy)
  • Different return expectations.
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14
Q

What is Shareholder engagement, and what determines its efficacy?

A

Reflects active ownership by investors, seeking to influence companies decision impact ESG. Efficacy depends on

  • Scale of ownership
  • Quality of engagement
  • Known that divestment is an option
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15
Q

What is the Financial materiality of ESG integration and investment?

A
  • Reduced cost and increased efficiency
  • Reduced risk of fines and state interventions
  • Reduced externalities
  • Improved adaptability to megatrends
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16
Q

What are externalities?

A
  • Situations where the production or consumption of goods and services creates costs or benefits to others that not reflected in the price.
  • When externalities are negative, private costs are lower than societal costs, leading to market failures.
17
Q

How can climate change costs be internatlisation by governmetns and markets? What instruments exist?

A
  • Market-based instruments e.g. charges, taxes or tradeable permits
  • Regulatory instruments e.g. standards
  • Voluntary instruments
18
Q

What are megatrends?

A
  • Urbanization and Emerging economies
  • Technological disruption
  • Demographic change
  • Wealth inequality
  • Climate change and resource scarcity
19
Q

What do we know about ESG and financial performance?

A
  • Overwhelming evidence indicates positive correlation between ESG and financial performance
  • Positive correlation between ESG performance and stock price
  • But no clear correlation between ESG and fund level performance
  • Good ESG standards lower cost of capital
  • Positive correlation operational performance
20
Q

What can be considered modern ESG fiduciary duty?

A

○ Incorporate ESG factors in investment decision making
○ incorporate sustainability preferences of beneficiaries or clients, regardless if these preferences are financially material
○ Be active owners, encourage high ESG standards in invested companies/assets
○ Support stability and resilience financial system
- Disclose investment approach and how preferences are incorporated

21
Q

What are universal owners, and why do they need to adress ESG?

A
  • Large institutional owners with highly diversified holdings across sectors and asset classes that represent the global market and investible universe
  • Their investment returns depend on global economy
  • Need to include ESG factors to account for megatrends
22
Q

What are the Six Principles for Responsible Investment ?

A
  1. Incorporate ESG issues in investment analysis and decision making process
  2. Active owners and incorporate ESG in ownership policies and practices
  3. Seek ESG disclosure in invested entities
  4. Promote principles in investment industry
  5. Work together in implementing principles
  6. Report on implementation activities
23
Q

What are the minimum requirements for the PRI?

A
  • Investment policies covering firm’s responsible investment policy covering >50% assets
  • Internal or external staff responsible for implementing investment policy
  • Senior level commitment and accountability mechanisms
24
Q

What are the key areas for the Global Compact?

A
  1. Environment
  2. Labor
  3. Human rights
  4. Anti corruption
25
Q

What are the four key areas of the

Task Force on Climate-related Financial disclosures (TCFD)?

A
  1. Governance - around organizations climate-related risks and opportunities
  2. Strategy - the actual potential impact of risks and opportunities on organizations strategy, business and financial planning
  3. Risk management
  4. Metrics and targets
26
Q

What is ESG investing?

A
  • Taking ESG factors into account in investment decisions
  • Acknowledging own role in having negative and positive ESG impact
  • Ensuring holistic sustainability of long-term returns, functioning of society, environment and economy

CFA ESG Investment (9 decks)

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