Chapter 10 Flashcards
What is the FCA’s anti-green washing rule?
Applies to all FCA authorised firms making sustainability-related claims about their products and services.
How can asset owners develop their position on climate change?
By following guidance from the Pensions and Lifetime Savings Association (PLSA), which also produces a Stewardship Checklist. This checklist includes a defined set of agreed investment beliefs and how to monitor a scheme’s investment policies.
What does the PRI say asset owners should require of investment managers?
- Integrate ESG issues into investment research, analysis, and decision making
- Implement effective stewardship policies
- Engage policymakers
- Report on actions taken and outcomes achieved
What is asset liability management?
Similar to SAA, but considers factors such as equities being a hedge against inflation or fixed income being less volatile
These assumptions are impacted by climate
The Society of Actuaries consider which 3 aspects of measuring climate risk exposures in portfolios?
- Carbon risk
- Climate change risk under scenario-based models
- Stranded asset risk
Name 3 popular investment frameworks
- PAII/IIGCC NZIF
- Investment Association (IA): the Responsible Investment Framework
- Institute for Climate Economics (I4CE) Framework
Two key dimensions of NZIF?
Decarbonising portfolios in line with net zero
Increasing investment in climate solutions
5 principles of NZIF?
Impact
Rigour
Practicality
Accessibility
Accountability
Which targets does NZIF suggest?
Top down: emissions intensity and allocation to climate solutions
Bottom up: % alignment and minimum coverage for engagement (or alignment)
What does the IA’s Responsible Investment Framework call on investment managers to do?
Make commitments to:
1. Engage companies
2. Support asset owners in communicating how they want asset managers to incorporate climate
3. TCFD disclosure
4. Link to initiatives on Paris alignment
5. Support work of FCA/PRA Climate Financial Risk Forum
6. Support creation of investable opportunities such as green gilts
What does the I4CE framework say?
Alignment of portfolios should be:
- integrated into overall investment strategies
- integrated into operational frameworks and procedures
- focused on new activities while covering existing portfolios
Disadvantages of climate improvers approach?
Restricts investable universe to those companies disclosing the metric selected and have been doing so for several years to judge improvement
Disadvantage of best in class?
Valuation premium already baked in
What is the tilting portfolio exposure strategy?
Weighting climate leaders more but still investing in all. Often passive.
However, may be seen as weaker if no exclusions at all to manage greatest risks
Disadvantages of thematic investing?
Little diversification
Hard to benchmark
Overcrowding in specific areas such as clean energy
How does the Global Impact Investing Network (GIIN) define impact investing?
- Intentionality
- Financial returns - not philanthropy
- Range of asset classes - can be any
- Impact measurement and reporting
What is the European Benchmark Regulation and its relevant climate delegated acts?
Contains ESG disclosure requirements for all investment benchmarks in addition to the EU Climate Transition Benchmark and the EU Paris-aligned Benchmark.
What does the EU aim to achieve on climate benchmarks?
Comparability
Took for investment strategy
Transparency
Preventing greenwashing
Excludes current and interest rate benchmarks
Benchmark provides must do what under EU benchmark legislation?
Outline how methodology Akins to Paris agreement. And providers should endeavour to provide one or more EU Climate Transition Benchmarks
Benchmarks using EU CTP or PAB labels must?
Adhere to strict controls, e.g. 7% YoY reduction and cannot breach for 2 years in a row or fails to reach targets 3 times out of 10 years
Only cover equities and corporate fixed income
How can the applications of indices be categorised?
- Policy benchmark to guide asset allocation
- Performance benchmark
- Financial instruments can leverage benchmark (e.g. ETFs or derivatives)
- Engagement tools. E.g. index ratings
What are the 3 key index construction steps?
- Index (universe) selection
- Index methodology
- Index governance
Which indexing approach yields lower tracking error?
Optimisation over reweighting
Challenges with green bond indices?
Lack of diversification and low liquidity given still emerging asset class
How is PAB structure than CTB?
- has fossil fuel exclusion thresholds
- 50% versus 30% co2 intensity reduction versus universe
- much better much better green-brown ratio than universe
Both must have scope 1-3 disclosure at company level, and science based pathways for each company
Global food production accounts for?
33% of global emissions
50% of habitable land use
80% of deforestation
