Chapter 2: ESG Market Flashcards
Describe the history of sustainability?
- Bruntland Report published in 1987 introduced concept of sustainable development
- Rio 1992
- Sullivan Principles on Apartheid
Can you please rank the ESG investment strategies for largest to smallest?
○ Negative exclusionary screening ○ ESG integration ○ Corporate engagement and shareholder action ○ Norms-based screening (Ethical) ○ Best in class ○ Sustainability-themed - Impact
What is the most common ESG strategies in EU, US/AU/NZ and Japan?
- Negative screening is largest in Europe
- ESG integration most common in US, CA, AU and NZ
- Corporate engagement and shareholder action in Japan
What are asset owners?
○ Legal owner of asset
○ Make asset allocation decision based on own objectives + analysis
○ Can outsource asset management via investment manadate
- Pension funds, Insurance, Individual investors and banks
What are asset managers
- Not legal owner of the asset
- Fiduciary duty to client
- Make investment decision s pursuant to investment management agreement
What does determine the effectiveness of asset owners ability to steer investment towards ESG?
○ Number of asset owners implementing responsible investment
○ Total AUM
- Quality of implementation across scales
What are the key stakeholders for pension funds?
- Executives - who manage the fund
- Trustees - hold ultimate fiduciary responsibility, similar to board of a company
- Beneficiaires
What can pension funds do to integrate long-termism?
- Integrate long-termism in their investment belief statement
- Set up investment mandate that places greater value on long-termism
- Demand long-term metrics from asset managers and underlying investees (assets)
What can asset managers do to work with ESG?
- Select securities and offer a portfolio of those to asset owners
- They influence ESG characteristics of the portfolio through selection, as well as engagement with investee companies
- Offer also new products indices and passive funds that integrate ESG
What are the principle tasks of policymakers?
- Maintain orderly financial markets
- Safeguard investments
- Orderly Expansion -> green bonds
What can policy makers do to promote ESG?
- Corporate disclosure
- Stewardship - Interactions between investors and investees, protect shareholders, stability of the market
- Asset owners - require pension funds to integrate ESG
What are the main challenges for ESG integration prior to integration?
- Perception that implementing ESG may have negative impact on financial performance
- Belief that fiduciary duty prevents ESG integration
- Bad advice from investment consultations and financial advisers
What are the main challenges for ESG integration once decision has been made?
- Lack of understanding to build an investment mandate that promotes ESG -> Model Mandate Initiative
- Perception that more resources are needed
- Gap between marketing, commitment and delivery of funds regarding ESG performance
What are the main challenges for ESG integration in terms of technical resources?
- Data availability - Disclosure is challenges
- Modelling - Challenging to integrate ESG into traditional financial models, breakthrough changes, no historical patterns
- Valuation techniques - To adjust corporate valuations with e.g. ESG-based discount rate future cash flow, or valuation ratios (price-to-earnings or book value)
What is portfolio tilting and when is it used?
- Tilting means “overweighting” or “underweighting” sectors or companies in a portfolio
- Required in screening, divestment and thematic investment
