Chapter 2: Introduction to the ESG market

Question 1

WCED (Brundtland Commission)

Answer 1

World Commission on Environment and Development. Convened in 1983 by the UN in response to mounting concer surrounding ozone depletion, global warming and other environmental problems. It is an international group of environmental experts, politicians and civil servants.

Question 2

Concept of sustainable development detailed in the Brundtland Report (1987) called “Our Common Future”

Answer 2

Meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Question 3

UNCED in Rio in 1992

Answer 3

__ led to the creation of the UN Commission on Sustainable Development that same year.

Question 4

What did the Rio Declaration on Environment and Development state?

Answer 4

It stated that businesses have a responsability to ensure that activities within their own operations do not cause harm to the environment.

Question 5

Historical examples of ESG investing

Answer 5

In the 17th and 18th centuries, religious groups, such as the Quakers and Methodists, already laid out guidelines to their followers about the types of activities in which they should or should not invest.

Question 6

Pioneer Fund

Answer 6

One of the first ethical mutual funds with screens based on religions traditions in 1928.

Question 7

Pax World Fund

Answer 7

Now IMPAX Asset Management, began at the height of the Vietnam War in 1971, offering alternative for those opposed to the production of nuclear and military arms.

Question 8

The Sullivan Principles

Answer 8

___, used by investors to engage and divest, required that a condition for investment for the investee company was to ensure that all employees, regardless of race, are treated equally and in an integrated environment as a condition for investment.

Question 9

List the key developments between early and modern SRI.

Answer 9

1) Growth in shareholder activism, 2) the more widespread consideration of environmental factors, and the introduction of positive-screening investing, which seeks to maximize financial return within a socially aligned investment strategy

Question 10

Describe how the modern form of ESG investing began

Answer 10

It began with a letter and a call to action in Jan-04, with Kofi Annan (UN SG) wrote to the CEOs of significant financial institutions to take part in an initiative, to integrate ESG factors into capital markets. The initiative produced a report titled “Who Cares Wins — Connecting Financial Markets to a Changing World,” which effectively coined the term “ESG.”

Question 11

The PRI

Answer 11

___ comprises an international network of investors—signatories—working together toward a common goal to understand the implications of ESG considerations for investment and ownership decisions and practices.

Question 12

Which reports formed the backbone for the launch of the PRI?

Answer 12

The Freshfileds Report, wchih showed that ESG issues are relevantto financial valuation and thsu fiduciary duty, and “Who Cares Wins”.

Question 13

Economic impact of climate change according to the Stern Review (2006).

Answer 13

According to the report, without action, the overall costs of climate change would be equivalent to losing at least 5% of global gross domestic product (GDP) each year, now and forever. Including a wider range of risks and impacts could increase this number to 20% of GDP or more.

Question 14

Market size of RI

Answer 14

One of the most comprehensive market reviews is conducted by the Global Sustainable Investment Alliance (GSIA), which conducts research in the five major markets for responsible investment (Europe, the United States, Japan, Canada, and Australia/New Zealand) every two years. Its most recent report showed sustainable investing assets in the five major markets stood at US$35.3 trillion at the start of 2020, a 15% increase in two years.

Question 15

Domicile of sustainable and RI

Answer 15

US manage 48% and Europe 34%.

Question 16

RI share of assets

Answer 16

Based on 2020 numbers,24% in Japan, 33% in the US, 38% in AUS/NZ, 42% in Europe and 62% in Canada.

Question 17

Largest RI Strategies by assets

Answer 17

ESG integration ($25.1tr AuM in 2020), negative/exclusionary screening ($15tr), corporate engagement and shareholder action.

Question 18

Geo distribution of SRI assets in 2020

Answer 18

48% in the US and 34% in Europe

Question 19

RI by asset class

Answer 19

In 2018, in Europe, NirthAm, Japan, most assets were allocated to public equities (51%), then fixed income (36%),

Question 20

List the key topics in this chapter

Answer 20

1. History of ESG investing
2. ESG investing in numbers
3. Market drivers of ESG and challenges in ESG integration
4. Asset Owners
5. Asset Managers, Fund Promoters, and Financial Services
6. Policymakers, regulators, investees, governments, civil society, and Academia
7. Key facts

Question 21

Main stakeholders among asset owners

Answer 21

Pension funds, Insurance, SWF, endowment funds and foundations, individual investors and wealth management

Question 22

Main stakeholders among fund promoters

Answer 22

Investment consultants and retail investment advisers
Investment platforms
Fund labelers

Question 23

Stakeholders in ESG investing

Answer 23

Asset owners, asset managers, fund promoters, financial services, policy makers, investees, government, civil society and academia.

Question 24

In 2019, Institutional asset owners

Answer 24

___ accounted for $54tr, of which 35% was concentrated in the 100 largest asset owners.

Question 25

The effectiveness of asset owners in steering the investment value chain toward an increased integration of ESG depends on?

Answer 25

The number of asset owners implementing responsible investment, the total AUM of these assets, and the quality of implementation across the different asset classes.

Question 26

What is an investment mandate?

Answer 26

An investment mandate is a contract between an asset owner and an asset manager defining expectations around the investment product and, at times, even aspects around the manager’s processes and resources more broadly.

Question 27

Pension funds among 100 largest asset owners

Answer 27

59%.

Question 28

Why do pension funds play a key role in influencing the investment market?

Answer 28

They play a key role because of their size and the long-term nature of their investment.

Question 29

Describe the internal players driving pension funds

Answer 29

They are driven by three internal players: 1. Executives, who manage the fund’s day-to-day functioning,
2. Trustees, who hold the ultimate fiduciary responsibility, act separately from the employer, and hold the assets in the trust for the beneficiaries of the scheme,
3. Beneficiaries/members, who pay into the fund or are pensioners benefiting from the assets.

Question 30

Why has fiduciary duty become a driver for trustees to act on ESG issues?

Answer 30

In a survey that was conducted among more than 300 global institutional investors, 46% of respondents cited the need to meet fiduciary duty and regulations as a key driver for adopting ESG principles. This results from a number of litigation in the UK and Australia.

Question 31

Main categories of insurance

Answer 31

P&C (includes insurance from liabilities and damages to property), life, re-insurance.

Question 32

SWF AuM in 2020?

Answer 32

$8tr

Question 33

Endowment funds

Answer 33

___ are funds set up in a foundation by institutions that wish to fund their ongoing operations through withdrawals form the fund.

Question 34

Adoption of ESG investing by retail investors

Answer 34

___ has been slower than for Institutional. At the end of 2018 in the United States, only US$161 billion of the total US$22.1 trillion in assets have gone to those referencing ESG considerations.

Question 35

What suggests that adoption of ESG investing by retail investors is gaining pace?

Answer 35

Inflows in open-ended and exchange-traded funds (ETFs) have been increasing. In 2020, sustainable fund flows accounted for nearly 1/4th of overall flows into funds in the US.

Question 36

Why do Millenials matter for ESG investing?

Answer 36

They matter for two reasons. First, they care, as many studies have highlighted. Second, they are the future recipients of an expected $30tr intergenerational wealth transfer through inheritance form baby boomers.

Question 37

Impact of Millenial investing?

Answer 37

Bank of America Merrill Lynch has predicted that over the next two or three decades, millennials could put between US$15 trillion (£10.8 trillion) and US$20 trillion (£14.4 trillion) into US-domiciled ESG investments, which would roughly double the size of the entire US equity market.

Question 38

Define “Asset Manager” and their ESG influence.

Answer 38

An asset manager selects the securities and offer portfolios consisting of these securities to asset owners. They exert ESG influence through security selection and engagement with investee companies to improve their ESG performance.

Question 39

List challenges to asset owners in integrating ESG issues.

Answer 39

Lack of clear signal from asset owners. Narrow interpretation of investment objectives by investment consultants and financial advisers. Resource challenges, especially for investors who see ESG investing as separate from the core investment process.

Question 40

Define “fund promoter”

Answer 40

Fund promoters include investment consultants and retail financial advisers, investment platforms, fund labelers.

Question 41

Why is it important that investment consultants and retail financial advisers embrace ESG investing?

Answer 41

They advise asset owners and retail investors respectively; they are the gatekeepers for the expansion of ESG investing. Their advice is often accepted with little hesitation. Hence, the PRI effort to educate them on the implications of ESG investing.

Question 42

When did the PRI effort towards consultant start?

Answer 42

The effort started in 2017, after a review concluding that consultants were falling behind in ESG investing. In 2019 the PRI published guidance fro asset owners to request ESG information from consultants.

Question 43

What is the SFRD?

Answer 43

The SFDR is an EU regulation introducing mandatory regulation for investment funds and rating agencies to explicitly consider ESG issues. Sustainable Finance Disclosure Regulation.

Question 44

Why is it important that investment platforms integrate ESG investing?

Answer 44

They can increase awareness of ESG funds for both retail and institutional investors, and enable easier identification of and information on these funds.

Question 45

What are the three objectives of financial regulators?

Answer 45

Maintain orderly financial markets. Safeguard investments in financial instruments, savings/pensions, and investment vehicles. Bring about an orderly expansion of activities of the financial sector.

Question 46

What are the three main themes of ESG regulation?

Answer 46

Corporate disclosures: Requiring investee companies to disclose ESG information.
Stewardship. Governs the interactions between investor and investee companies. In most jurisdictions, Stewardship codes are voluntary, though mandatory regulation has been approved in Europe.
Asset owners. Typically focuses on pension funds, requiring them to disclose their process and outcome.

Question 47

How did the TCFD influence ESG investing?

Answer 47

In 2017, it released climate-related disclosure guidelines, whcih have been since made mandatory in many jurisdictions. The EU SFDR, which has a borader scope, effectively applied TCFD guidelines. All G-7 backed mandatory reporting.

Question 48

What have EU regulators done recently on ESG investing?

Answer 48

In June-2020, the EU Taxonomy Regulation established a framework that states conditions for an economic activity to be considered sustainable. In Dec-19, the SFDR created requirements to promote consideration of environmental and social risks that may affect investments.

Question 49

What happened in the US in 2022?

Answer 49

in Apr-22, the SEC proposed far-reaching disclosure requirements for climate risks. In its initial version, it governs how a regulated firm is to report on the following:
1. How climate-related risks are governed by a firm’s board and management
2. The firm’s climate-related impacts, goals, targets and transition plans
3. Scope 1 & 2
4. Scope 3 if material.