Chapter 1: Introduction to ESG Flashcards
Define ESG Investing?
Asset managment approach that acknowledges importance of ESG in
- investment decisions
- own role as owners
- own roal as creditors
Impact of ESG?
- Risk
- Volatility
- Long-term return
- Individual securities and market
Define Corporate Social Responsibility?
Broad concept that companies want to act in an ethical way.
What is tripple P accounting
- People
- Planet
- Profit
What is Responsible investment?
- 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
What are the main responsible investment strategies?
- Best-in class investing
- Socially responsible investing
- Sustainable investing
- Thematic investing
- Green investing
- Social investment
- Impact investment
- Ethical and Faith based investing
What is Best-in class Investment? (criteria, selection, diversification, tracking error, screening)
- 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
What is Socially responsible investment? (criteria, selection, diversification, tracking error, screening)
- 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
What is Sustainable Investment? (criteria, selection, diversification, tracking error, screening)
- 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
What is Thematic Investment? (criteria, selection, diversification, tracking error, screening)
- 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
What is Green Investment? (criteria, selection, diversification, tracking error, screening)
- Broad subcategory of thematic investment
What is Social Investment? (criteria, selection, diversification, tracking error, screening)
- Adresses bottom-of-the-period.
- Is a market-based instrument of economic development and poverty eliviation and
- includes invesmtments in micro-finance.
What is Impact Investment? (criteria, selection, diversification, tracking error, screening)
- Investment made with specific ESG impact and financial return (unlike philantrophy)
- Different return expectations.
What is Shareholder engagement, and what determines its efficacy?
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
What is the Financial materiality of ESG integration and investment?
- Reduced cost and increased efficiency
- Reduced risk of fines and state interventions
- Reduced externalities
- Improved adaptability to megatrends
What are externalities?
- 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.
How can climate change costs be internatlisation by governmetns and markets? What instruments exist?
- Market-based instruments e.g. charges, taxes or tradeable permits
- Regulatory instruments e.g. standards
- Voluntary instruments
What are megatrends?
- Urbanization and Emerging economies
- Technological disruption
- Demographic change
- Wealth inequality
- Climate change and resource scarcity
What do we know about ESG and financial performance?
- 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
What can be considered modern ESG fiduciary duty?
○ 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
What are universal owners, and why do they need to adress ESG?
- 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
What are the Six Principles for Responsible Investment ?
- Incorporate ESG issues in investment analysis and decision making process
- Active owners and incorporate ESG in ownership policies and practices
- Seek ESG disclosure in invested entities
- Promote principles in investment industry
- Work together in implementing principles
- Report on implementation activities
What are the minimum requirements for the PRI?
- 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
What are the key areas for the Global Compact?
- Environment
- Labor
- Human rights
- Anti corruption
What are the four key areas of the
Task Force on Climate-related Financial disclosures (TCFD)?
- Governance - around organizations climate-related risks and opportunities
- Strategy - the actual potential impact of risks and opportunities on organizations strategy, business and financial planning
- Risk management
- Metrics and targets
What is ESG investing?
- 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
