Chapter 1: Introduction to ESG Investing

Question 1

ESG Investing

Answer 1

ESG investing is an approach to managing assets where investors explicitly incorporate environmental, social and governance (ESG) factors in their investment decisions with the long-term return of an investment portfolio in mind.

In other words, ESG investing aims to correctly identify, evaluate and price social, environmental and economic
risks and opportunities.

Question 2

Triple bottom line (TBL)

Answer 2

ESG investing also recognises that the generation of long-term sustainable returns is dependent on stable, well-functioning
and well-governed social, environmental and economic systems. This is the so-called triple bottom line (TBL) coined by business writer John Elkington. However, since its inception, the concept of TBL evolved from a holistic approach to sustainability, and further into an accounting tool to narrowly manage trade-offs.
Because of this, Elkington ‘recalled’ the term in a 2018 Harvard Business Review article.

Ultimately, ESG investing recognises the dynamic inter-relationship between social, environmental and governance issues and investment. It acknowledges that:
▶ social and environmental as well as governance issues may impact the risk, volatility and long-term return of securities (as well as markets); and
▶ investments can have both a positive and negative impact on society and the environment.

Question 3

Corporate Sustainability

Answer 3

Corporate sustainability is an approach aiming to create long-term stakeholder value through the implementation of a business strategy that focuses on the ethical, social, environmental, cultural and economic dimensions of doing
business.

Question 4

Corporate social responsibility (CSR)

Answer 4

Corporate social responsibility (CSR) is a broad business concept that describes a company’s commitment to conducting its business in an ethical way. Throughout the 20th century and until recently, many companies implemented CSR by contributing to society through philanthropy. While this may indeed have a positive impact on communities, modern understanding of CSR recognises that a principles-based behaviour approach can play a strategic role in a firm’s business model. This led to the theory of TBL.

Question 5

The TBL accounting theory

Answer 5

The TBL accounting theory expands the traditional accounting framework focused only on profit to include two other performance areas: the social and environmental impacts of a company. These three bottom lines are often referred to as the three Ps:

1. people;
2. planet; and
3. profit.

While the term and concept are useful to know, including for historical reasons, they have been replaced in the industry with a broader framework of sustainability that is not restricted to accounting.

Question 6

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.

ESG investing recognises these benefits and aims to consider them in the context of security/asset selection and portfolio construction.

Question 7

Responsible investment

Answer 7

Responsible investment is a strategy and practice to incorporate ESG factors into investment decisions and active ownership. It is sometimes used as 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.

At a minimum, responsible investment consists of mitigating risky ESG practices in order to protect value. To this end, it considers both how ESG might influence the risk-adjusted return of an asset and the stability of an economy, as well as how investment in, and engagement with, assets and investees can impact society and the environment.

Question 8

Socially responsible investment (SRI)

Answer 8

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

Investors implementing SRI 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.

SRI ranking can be used in combination with best-in-class investment, thematic funds, high-conviction funds or quantitative investment strategies.

Question 9

Best-in-class investment

Answer 9

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.
Bear in mind, though, that not all best-in-class funds are considered to be ‘responsible investments’.

Due to its all-sector approach, best-in-class investment is commonly used in investment strategies that try to maintain certain characteristics of an index. In these cases, security selection seeks to maintain regional and
sectorial diversification along with a similar profile to the parent market cap index while targeting companies with higher ESG rating.

Question 10

Sustainable investment

Answer 10

Sustainable investment refers to the selection of assets that contribute in some way to a sustainable economy, i.e. an asset that minimises 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.

The term ‘sustainable investment’ can also be employed to mean a strategy that screens out activities considered contrary to long-term environmental and social sustainability, such as coal mining or exploring for
oil in the Arctic regions.

Question 11

Thematic investment

Answer 11

Thematic investment refers to selecting companies that fall under a sustainability-related theme, such as clean-tech, sustainable agriculture, healthcare or climate change mitigation.

Thematic funds pick companies within various sectors that are relevant to the theme. A smart city fund, for example, might invest in companies offering activities or products related to electric vehicles, public
transportation, smart grid technology, renewable energy and/or green buildings.

Bear in mind, though, that not all thematic funds are considered to be responsible investments or best-in-class. Becoming one not only depends on the theme of the fund, but also on the ESG characteristics of the investee companies.

Question 12

Green investment

Answer 12

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.

Green investment can thus be considered a broad sub-category of thematic investing and/or impact investing. Green bonds, a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects, are commonly used in green investing.

Question 13

Social investment

Answer 13

Social investment refers to allocating capital to assets that address social challenges. These can be products that address the bottom of the pyramid (BOP).

Social investing can also include social impact bonds, which are a mechanism to contract with the public sector. This sector pays for better social outcomes in certain services and passes on part of the savings
achieved to investors.

Question 14

Bottom of the pyramid (BOP)

Answer 14

BOP refers to the poorest two-thirds of the economic human pyramid, a group of more than four billion people living in poverty. More broadly, BOP refers to a market-based model of economic development that seeks to
simultaneously alleviate poverty while providing growth and profits for businesses serving these communities. Examples include:

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

Question 15

Impact investing

Answer 15

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). These are usually associated with direct investments, such as in private debt, private equity and real estate. However, in recent years, impact investing has increasingly mainstreamed into the public markets.

Impact investments can be made in both emerging and developed markets. They provide capital to address the world’s most pressing challenges by investing in projects and companies that may, for example:

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

Measurement and tracking of the agreed-upon impact generally lies at the heart of the investment proposition.

Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns in line with their strategic objectives. Others pursue market-competitive and market-beating returns,
sometimes required by fiduciary responsibility.

Question 16

Global Impact Investing Network (GIIN)

Answer 16

The GIIN focuses on reducing barriers to impact investment by building critical infrastructure and developing activities, education and research that help accelerate the development of a coherent impact investing industry.

Question 17

Ethical (or value-driven) and faith-based investment

Answer 17

Ethical (also known as value-driven) 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.

From religious individuals to large religious organisations, faith-based investors have a history of shareholder activism to improve the conduct of investee companies. Another popular strategy is portfolio building with
a focus on screening out the negative; in other words, avoiding ‘sin stocks’ or other assets at odds with their beliefs.

Question 18

Shareholder engagement

Answer 18

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). It is seen as complementary to the before-mentioned approaches to responsible investment as a way to encouraging companies to act more responsibly. Its efficacy usually
depends on:

▶ the scale of ownership (of the individual investor or the collective initiative);
▶ the quality of the engagement dialogue and method used; and
▶ whether the company has been informed by the investor that divestment is a possible sanction.

Question 19

Freshfields report

Answer 19

In 2005, the United Nations Environment Programme Finance Initiative (UNEP FI) commissioned the law firm Freshfields Bruckhaus Deringer to publish the report titled A Legal Framework for the Integration
of Environmental, Social and Governance Issues into Institutional Investment (commonly referred to as the Freshfields report).

The report argued that “integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”

Despite the conclusions of the report, many investors continue to point to their fiduciary duties and the need to deliver financial returns to their beneficiaries as reasons why they cannot do more in terms of responsible
investment.

Question 20

Fiduciary/ Fuduciary duty

Answer 20

Fiduciary is an individual or institution that manages money or other assets on behalf of beneficiaries and investors.

Fiduciary duty is the responsibility borne by a trustee and indeed, any investor charged with looking after assets on behalf of another. At its core, it is the responsibility to always act in the client’s best interest and with due
care.

Question 21

UNEP FI and Principles for Responsible Investment (PRI) on the topic fiduciary duty

Answer 21

The UNEP FI and Principles for Responsible Investment (PRI) on the topic have clarified that financially material ESG factors must be incorporated into investment decision-making. The 2005 UNEP FI report and the more recent report published by the PRI in 2019 both argue that failing to consider long-term investment value drivers – which include ESG issues – in investment practice is a failure of fiduciary duty. The 2019 PRI report concludes that modern fiduciary duties require investors to:

▶ Incorporate financially material ESG factors into their investment decision-making, consistent with the time frame of the obligation.
▶ Understand and incorporate into their decision making the sustainability preferences of beneficiaries or clients, regardless of whether these preferences are financially material.
▶ Be active owners, encouraging high standards of ESG performance in the companies or other entities in which they are invested.
▶ Support the stability and resilience of the financial system.
▶ Disclose their investment approach in a clear and understandable manner, including how preferences are incorporated into the scheme’s investment approach.

Question 22

Financial Stability Board (FSB)

Answer 22

The Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, has identified climate change as a potential systemic risk. This may also be the case for other issues. The economic implications of these environmental issues (such as climate change, resource scarcity, biodiversity loss and deforestation) and social challenges (such as poverty, income inequality
and human rights) are increasingly being recognised.

Question 23

Stockholm Resilience Centre

Answer 23

The Stockholm Resilience Centre has identified nine ‘planetary boundaries’ within which humanity can continue to develop and thrive for generations to come, but in 2015 found that four – climate change, loss of biosphere integrity, land-system change and altered biogeochemical cycles (phosphorus and nitrogen) – have been crossed. Two of these – climate change and biosphere integrity – are deemed ‘core boundaries’, for which
significant alteration would ‘drive the Earth System into a new state’.

Question 24

Doughnut economics

Answer 24

A popular framework that builds on that of ‘planetary boundaries’ is the doughnut economics. It is a diagram developed by economist Kate Raworth that combines planetary boundaries with the complementary concept of social boundaries.

Question 25

Universal ownership

Answer 25

Universal owners are investors that, because of their large size, own
a portion of the entire economy and the market across their highly diversified, long-term portfolios. The scope and size of their investments
often mean that their investment returns are contingent on the continued health of the economy and markets.

Question 26

UN Sustainable Development Goals (SDGs)

Answer 26

The UN Sustainable Development Goals (SDGs), an agreed framework for all UN member state governments to work towards in aligning with global priorities (such as the transition to a low carbon economy and the elimination of human rights abuses in corporate supply chains)

Question 27

Financial materiality of integrating ESG

Answer 27

One of the main reasons for ESG integration is recognising that ESG investing can reduce risk and enhance returns, as it considers additional risks and injects new and forward-looking insights into the investment
process. ESG integration may therefore lead to:

1. reduced cost and increased efficiency;
2. reduced risk of fines and state intervention;
3. reduced negative externalities; and
4. improved ability to benefit from sustainability megatrends.

Question 28

Externalities

Answer 28

This 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. When externalities are negative, private costs are lower than societal costs, resulting in market
outcomes which may not be efficient or, in other words, leading to ‘market failures’.

Question 29

Internalisation

Answer 29

Internalisation refers to all measures (public or private) to ensure that externalities become reflected in the prices of commercial goods and services. As environmental and social regulation and taxation rise, it is expected that an increasing proportion of this cost might be forced into companies’ accounts.

In the social sphere, recent developments in the interpretation of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights – clarifying that these
instruments apply to investors and give rise to responsibility for conducting human rights’ due diligence on investments – are in effect paving the way for more formal internalisation of social costs in hard law.

Internalisation can happen in various ways. Taking the transportation industry by way of example, internalisation can happen through:
▶ market-based instruments, e.g. charges, taxes and tradable permits;
▶ regulatory instruments, e.g. vehicle emission and safety standards, traffic restrictions; or
▶ voluntary instruments, e.g. agreements with the car industry to reduce CO2 emissions from new passenger cars.

Question 30

Sustainability megatrends

Answer 30

Emerging markets and urbanisation;
Technological innovation;
Demographic changes and wealth inequality;
Climate change and resource scarcity

Question 31

Challenges in integrating ESG

Answer 31

Prior to wishing to implement ESG:
▶ The perception that implementing ESG may have a negative impact on investment performance.
▶ The interpretation that fiduciary duty prevents investors from integrating ESG.
▶ The advice given by investment consultants and retail financial advisers, has many times not been supportive of products which integrate ESG.

Once the decision has been made to implement ESG:
▶ The lack of understanding of how to build an investment mandate that effectively promotes ESG or lack of understanding of what are the needs of asset owners regarding ESG.
▶ The impression that significant resources, which may be lacking in the market or may be expensive, are needed. These include human resources, technical capability, data and tools.
▶ The gap between marketing, commitment and delivery of funds regarding their ESG performance.

Question 32

Challenge of resource

Answer 32

The challenge of resources is especially prominent for asset owners who have funding constraints, or investors who see ESG investing as separate from the core investment process (e.g. marketing or compliance). In addition to the costs of building or buying expertise in ESG, investors may face other costs for items such as research, data, monitoring and reporting.

Even when financial resources are available, investors still have difficulties identifying or creating technical resources such as high-quality, standardised data sets, modelling capability and valuation techniques.

Without such resources, it is not always straightforward to understand the effects of ESG risks and opportunities at the investee company level. This is because these risks and opportunities will be invisibly incorporated into the investee’s overall financial performance, and therefore, before their materialisation, will be invisible in the investor’s (non-ESG) financial models.

As a result of these difficulties, ESG analysis often takes the form of a qualitative input that is used alongside traditional quantitative models. The portfolio manager might use the quality score just for information, or might set a hurdle for a stock to be included in the portfolio. These types of metric risk are less respected by portfolio managers than financial analysis because quantifying the input and its impact is generally a challenge.

A growing challenge to the industry is greenwashing. Greenwashing originally described misleading claims about environmental practices, performance or product, but has been used more widely to incorporate ESG factors more broadly. The phenomenon is not restricted to the investment industry, but with the rise of a plethora of new ESG-type funds, including impact funds, the challenge of how to spot and avoid greenwashing has become more prevalent.

Question 33

Meta-analysis

Answer 33

Companies with good ESG factors outperform, but that investors were not always good at capturing that outperformance.
▶ 90% conclude that good ESG standards lower the cost of capital;
▶ 88% show that good ESG practices result in better operational performance; and
▶ 80% show that stock price performance is positively correlated with good sustainability practices.

Between 2006 and 2010, compared to control companies, the top 100 sustainable global companies experienced significantly higher:
▶ mean sales growth;
▶ return on assets;
▶ profit before taxation; and
▶ cash flows from operations in some sectors.

Question 34

ESG investing is a strategy and practice

Answer 34

ESG investing is a strategy and practice related to incorporating ESG factors in investment decisions and active ownership. Institutional investors typically reflect ESG considerations in three ways:
A. incorporating ESG factors into investment decision-making;
B. through corporate engagement; and
C. through policy engagement.

Asset owners:
» can include ESG factors in their request for proposal and consider them in their appointment process;
» are often supported by investment consultants, who can factor in asset managers’ ESG policy, implementation and outcomes in their selection process; and
» can reassure themselves that their views on ESG are implemented by integrating them into investment mandates and monitoring processes.

Asset owners and some asset managers can embed ESG into strategic asset allocation (SAA). SAA is the process in which an investor chooses to allocate capital across asset classes, sectors and regions based on their need for return and income, and risk appetite.

Asset managers and asset owners who invest directly can incorporate ESG issues within their security selection process. This can be done by:
» using ratings to apply a filter or threshold, which rules potential investments in or out of the investment universe;
» integrating ESG issues within their financial and risk analysis; or
» using ESG criteria to identify investment opportunities through a thematic approach (e.g. water fund, impact investing, etc.).

The proper functioning of the market, and thus public policy, such as for example the EU’s taxonomy for sustainable activities, critically affect the ability of institutional investors to generate sustainable returns and create value. Policy engagement by institutional investors is therefore a natural extension of an investor’s responsibilities and fiduciary duties to the interests of beneficiaries.

Investors can work with regulators, standard setters and other parties (e.g. consultants, stock exchanges, etc.) to design a financial system that:
▶ is more sound and stable;
▶ levels the playing field; and
▶ brings ESG more effectively into financial decision-making.

Investors can:
▶ respond to policy consultations;
▶ participate in collective initiatives; and
▶ make recommendations to policy makers.

Question 35

United Nations Global Compact

Answer 35

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 Labour Organization’s Declaration on Fundamental Principles and Rights at Work.

The ten principles of the UNGC cover the areas of 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 directly aided companies in becoming more
sustainable.

Question 36

United Nations Environment Programme Finance Initiative (UNEP FI)

Answer 36

The United Nations Environment Programme Finance Initiative (UNEP FI) is a partnership between UNEP and the global financial sector to mobilise private sector finance for sustainable development.

UNEP FI started in 1992 with a few banking institutions and today it works with over 300 members – banks insurers and investors – to catalyse integration of sustainability into financial market practice. The frameworks
UNEP FI has established or cocreated include:

▶ Principles for Responsible Investment (PRI), established in 2006 by UNEP FI and the UN Global Compact, now applied by more than half the world’s institutional investors (US$103.4tn (£74tn)).

▶ Principles for Sustainable Insurance (PSI), established 2012 by UNEP FI and today applied by more than one-quarter of the world’s insurers (more than 25% of world premium volume).

▶ Principles for Responsible Banking (PRB), as of April 2021, more than 220 banks have signed up to the PRB, representing US$57tn (£41tn) in total assets, or more than one-third of the global banking sector.

Question 37

Principles for Responsible Investment (PRI)

Answer 37

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 provide support in four main areas:

1. The PRI provides a broad range of tools and reports on best practices for asset owners, asset managers, consultants and data suppliers, supporting the implementation of the principles across all asset classes and providing insights into ESG issues.
2. It hosts a collaborative engagement platform, by which it leads engagements and also enables like-minded institutions to coordinate and take forward engagement with individual companies and sectors.
3. The PRI reviews, analyses and responds to responsible investment-related policies and consultations. It also provides a policy map to investors and facilitates communication between investors and their regulators on the topic of responsible investment.
4. The PRI Academy develops, aggregates and disseminates academic studies on responsible investment-related themes.

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.

The PRI also leads or establishes partnerships with other organisations to develop initiatives, such as a review of fiduciary duty around the world, the establishment and implementation of the Sustainable Stock Exchanges Initiative, etc. Many of its workstreams and initiatives are supported by committees made of members, which is a key way in which investors can gain further insight, and contribute to the development of knowledge and the further implementation of responsible investment across the industry.

For some in the investment industry, membership of the PRI has become a badge for being a responsible investor. The PRI does require members to report annually on their responsible investment practices, which are
assessed by the PRI. The report is made available to the public, while the assessment is private to the member, who can then decide whether, and with whom, they may wish to share it (e.g. asset managers share the report
with an existing or prospective client asset owner). Amid criticism that, despite the assessment, there were no minimum requirements to become a member beyond payment of the membership fees, the PRI implemented minimum requirements in 2018. The three requirements are:
1. Investment policy that covers the firm’s responsible investment approach, covering >50% of assets under management (AUM).
2. Internal or external staff is responsible for implementing responsible investment policy.
3. Senior-level commitment and accountability mechanisms for responsible investment implementation.

Question 38

United Nations Framework Convention on Climate Change (UNFCCC)

Answer 38

Climate change has been a focus to the UN and more recently, of investors as well. The United Nations Framework Convention on Climate Change (UNFCCC), launched at the Rio de Janeiro Earth Summit in 1992, aims to stabilise GHG emissions to limit man-made climate change.

The UNFCCC hosts annual Conferences of the Parties (COP) meetings, which seek to advance members states’ voluntary agreements on limiting climate change.

The two COPs of particular importance were:

1. The COP3 meeting in Kyoto in 1997, which created the Kyoto Protocol. This commits industrialised countries to limit and reduce their GHG emissions in accordance with agreed individual targets.
2. The COP21 meeting in Paris in 2015, which led to the Paris Agreement. This commits developed and emerging economies to strengthen the response to the threat of climate change by keeping a global temperature rise this century well below 2°C (3.6°F) above pre-industrial levels.

The Paris Agreement had significant impact on investors, including government and civil societies’ expectations of them. This has led to investor-led initiatives to understand how to become aligned with the Paris Agreement, as well as various organisations engaging with investors on the topic.

Question 39

UN Sustainable Development Goals (SDGs)

Answer 39

The Sustainable Development Goals (SDGs), agreed to by all UN members in 2015 in replacement of the UN Millennial Goals, are the UN’s blueprint to address the key global challenges, including those related to poverty, inequality, climate change, environmental degradation, peace and justice. The 17 goals are all interconnected and particularly aimed at governments. The Paris Agreement, though negotiated in parallel to the SDGs, became one of its goals.

Despite the goals and subsequent targets not being directly applicable to businesses and investors, the SDGs have become a powerful framework for these groups, with some investors already reporting against their impact on the SDGs and allocating capital to contribute to their achievement.

Question 40

Global Reporting Initiative (GRI)

Answer 40

The Global Reporting Initiative (GRI) publishes the GRI Standards, which provide guidance on disclosure across environmental, social and economic factors for all stakeholders, including investors, whereas the other major frameworks are primarily investor focused. Several thousand organisations worldwide use the GRI framework, which is among the most well-known and is the standard for the United Nations Global Compact. The framework covers the most categories of sustainability activity and encourages anecdotes and further prose to help contextualisation.

Question 41

Value Reporting Foundation (VRF)

Answer 41

The Value Reporting Foundation (VRF) was formed upon the merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), two well-known global reporting initiatives. The objective of the VRF is to provide investors and corporates with a comprehensive corporate reporting framework across the full range of enterprise value drivers and standards. Before the merger, the IIRC developed the Integrated Reporting Framework (IRF) and the SASB issued the SASB standards. IRF encouraged companies to integrate sustainability within their strategy and risk assessment by integrating it into the traditional annual report. The aim of the integrated report was to make it easier for investors to review such information as part of normal research processes and thus increase the likelihood that sustainability information is material to investment decisions. The SASB standards were focused on key material sustainability issues, which affect 70-plus industry categories and were developed along with the SASB materiality maps. The SASB products were particularly helpful for investors determining what is material for reporting, and aids more standardised benchmarking. The product suites of the two merging organisations are expected to be combined in one portfolio of offerings.

Question 42

CDP (former Carbon Disclosure Project)

Answer 42

CDP is a non-governmental organisation (NGO) which supports companies, financial institutions and cities to disclose and manage their environmental impact. It runs a global environmental disclosure system in which nearly 10,000 companies, cities, states and regions report on their risks and opportunities on climate change, water security and deforestation.

Question 43

Climate Disclosure Standards Board (CDSB)

Answer 43

The Climate Disclosure Standards Board (CDSB) is an international consortium of business and environmental NGOs with the mission to create the enabling conditions for material climate change and natural capital information to be integrated into mainstream reporting.

Question 44

Corporate Reporting Dialogue (CRD)

Answer 44

Corporate Reporting Dialogue (CRD) is a joint project led by the CDP, the CDSB, the GRI, the IIRC and the SASB. Its objective is to drive better alignment of sustainability reporting frameworks with frameworks that
promote further integration of non-financial and financial information. Its Better Alignment Project is focused on driving better alignment in the corporate reporting landscape, to make it easier for companies to prepare effective and coherent disclosures that meet the information needs of capital markets and society.

Question 45

International Business Council ESG Disclosure Framework

Answer 45

The ESG Disclosure Framework (EDF) of the International Business Council (IBC) aims to bring greater consistency and comparability to sustainability reporting by establishing common metrics for company disclosure. The framework encourages disclosure on a ‘comply or explain’ basis, with materiality, confidentiality and legal constraints listed as acceptable reasons for not disclosing to a particular disclosure metric. Reporting is encouraged via annual reports or proxy statements to help ensure board oversight and participation of sustainability disclosure.

Question 46

Asia Investor Group on Climate Change (AIGCC)

Answer 46

The Asia Investor Group on Climate Change (AIGCC) is an initiative to create awareness among Asia’s asset owners and financial institutions about the risks and opportunities associated with climate change and low
carbon investing. AIGCC provides capacity for investors to share best practice and to collaborate on investment activity, credit analysis, risk management, engagement and policy.

AIGCC was founded to represent the Asian investor perspective in the evolving global discussions on climate change and the transition to a greener economy.

Question 47

Global Impact Investing Network (GIIN)

Answer 47

The Global Impact Investing Network (GIIN) focuses on reducing barriers to impact investment by building critical infrastructure and developing activities, education and research that help accelerate the development of a coherent impact investing industry. It:

▶ facilitates knowledge exchange;
▶ highlights innovative investment approaches;
▶ builds the evidence base for impact investing; and
▶ produces tools and resources.

Of note are its databases IRIS+ (of metrics for measuring and managing impact) and ImpactBase (of impact investing funds).

Question 48

Global Sustainable Investment Alliance (GSIA)

Answer 48

Many countries have a national forum for responsible investment. The Global Sustainable Investment Alliance (GSIA) is an international collaboration of these membership-based sustainable investment organisations. It is a forum itself for advancing ESG investing across all regions and asset classes.

Core members of the GSIA include representatives from the regional responsible investment forums of Europe, the USA, Canada, Japan, Australia and New Zealand. The GSIA reports draw on the in-depth regional and national reports and work from GSIA members.

Question 49

The International Corporate Governance Network (ICGN)

Answer 49

The International Corporate Governance Network (ICGN) is an investor-led organisation established in 1995 to promote effective standards of corporate governance and investor stewardship to advance efficient markets. Of note, the ICGN developed two key guidance documents for investors: one on stewardship and another one on investment mandates.

Question 50

Task Force on Climate-related Financial disclosures (TCFD)

Answer 50

The Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) takes the Paris Agreement’s target of staying well under 2°C (3.6°F), with the ambition of staying under 1.5°C (2.7°F) and tries
to operationalise it for the business world. Its June 2017 Final Report urges companies to disclose against the following:

▶ governance: the organisation’s governance around climate-related risks and opportunities;
▶ strategy: the actual and potential impacts of climate-related risks and opportunities on the organisation’s. businesses, strategy and financial planning;
▶ risk management: the processes used by the organisation to identify, assess and manage climate-related risks; and
▶ metrics and targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

The TCFD recommends that these disclosures are provided as part of the mainstream financial filings. For many, the emphasis that the TCFD puts on climate change as a board level issue is its greatest contribution, both in terms of enhancing disclosure and in helping to ensure that this crucial issue is actively considered at the top of organisations. It should also drive a substantial advance in disclosures by seeking transparency about realistic scenario planning, particularly around the physical impacts of climate change.

Question 51

The EU’s Sustainable Finance Disclosure Regulation (SFDR)

Answer 51

In March 2021, the European Union (EU)’s Sustainable Finance Disclosure Regulation (SFDR) came into force. The SFDR is designed to support institutional asset owners and retail clients to compare, select and monitor the sustainability characteristics of investment funds’ by standardising sustainability disclosures.

The disclosures are about the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social factors, and sustainable investment objectives.

The SFDR is one of the building blocks of the EU’s Sustainable Finance Action Plan. It applies to all financial advisors and financial market participants that construct financial products and/or provide investment advice or insurance advice in the European Economic Area (the EU member states plus Iceland, Liechtenstein, and Norway). SFDR stipulates areas of mandatory disclosure at two levels, that of the investment firm and that of the product. Further it introduces a new concept into the EU’s regulatory environment: Principal Adverse Impacts (PAIs).

PAIs are the negative effects from an investment on sustainability factors. These PAIs go into great detail and consist of 18 indicators for which disclosure is obligatory, and 46 voluntary disclosure indicators. Further, SFDR defines two categories of sustainable financial products: Article 8 products that promote sustainability characteristics, and the more strictly defined Article 9 products that have stringent, primary objectives for positive sustainability outcomes.