Chapter 2 Key Facts Flashcards
Our Common Future / Brundtland Report
In 1987, a Commission put together by the UN issued the Brundtland Report, also called Our Common Future, which introduced the concept of sustainable development and described how it could be achieved.
17th century to Vietnam. Pax World Fund.
The concept of responsible investing dates back to the 17th century.
The modern institutionalisation of ethical exclusions arguably began at the height of the Vietnam War in 1971 with the establishment of the Pax World Fund, the first ethical mutual fund.
Early 2000s —
WHO CARES WINS. UN GLOBAL COMPACT.
UNEP - FI. FRESHFIELDS
PRI. 2006
In the early 2000s, the UN Global Compact’s report Who Cares Wins encourages financial institutions to integrate ESG into capital markets. Concurrently, the UNEP FI produced the so-called Freshfields Report, which showed that ESG issues are relevant for financial valuation and thus, fiduciary duty. These two reports formed the backbone for the launch of the Principles for Responsible Investment (PRI) in 2006
Global Sustainable Investment Alliance’s (GSIA).
$30.7 Trillion 2018.
34% Increase.
Canada / New Zealand.
The Global Sustainable Investment Alliance’s (GSIA) most recent report shows sustainable investing assets in the five major markets stood at US$30.7 trillion (£23.7tn) at the start of 2018, a 34% increase in two years.
The proportion of sustainable investing relative to total managed assets grew in almost every region, and in Canada and Australia/New Zealand, responsible investing assets now make up most total assets under professional management.
Institutional and Growing Retail
Although institutional investors tend to dominate the financial market, interest by retail investors in responsible investing has been steadily growing;
in 2018, the retail portion of total ESG assets totaled one quarter.
ESG Public Equities
vs.
Fixed Income.
50% vs. 36%
Most ESG assets are allocated to public equities (over 50% at the start of 2018). The next largest asset allocation is in fixed income, with 36%.
ASSET OWNERS
Quality and Quantity
Asset owners set the direction of the investment value chain.
Asset owners’ understanding of how ESG factors influence financial returns and how their capital impacts the real economy…
… can significantly drive the amount and quality of ESG investing from the investment value chain.
Institutional asset owners -> contracts called investment mandates -> with asset managers.
Expectations. PRI Reporting. 90%.
Responsible Investment Policy.
Institutional asset owners establish contracts, known as investment mandates, with asset managers.
These are important as they define the expectations around the investment product, and at times even aspects about the manager’s processes and resources more broadly.
The large majority (over 90%) of asset owner signatories of the PRI require in their investment mandate that asset managers act in accordance with the asset owner’s
responsible investment policy and over half of the asset owners (65%) also require reporting.
Shortfalls of Short-Termism.
Professor John Kay for the UK Government in 2012.
Many actors in the investment value chain have recognised the shortfalls of short-termism in investment practice and have sought to increase awareness of the value of long-termism and encourage it.
Short- termism may leave companies less willing to take on projects (such as research and development)
that may take multiple years – and patient capital – to develop.
Furthermore, short-term investment strategies tend to ignore factors that are considered more long-term, such as ESG factors.
This was confirmed by a review conducted on the UK equity market and long-term decision-making by Professor John Kay for the UK Government in 2012.
Pension Funds (in theory)
In theory, asset owners with long-term liabilities (like pension funds) are well aligned with long-term investing and are due to benefit from it.
In practice, they at times help create the problem by rewarding managers and companies for short-term behaviour.
Insurers. Extreme Weather and Demographics.
Insurers are by nature sensitive to certain aspects of ESG due to factors impacting insurance products, such as the frequency and strength of extreme weather events (P&C – property and casualty) and demographic changes (life insurance).
Retail, Institutional, Millennials.
The adoption by retail investors has been generally slower than that of institutional investors.
Surveys have generally found that millennials are interested in ESG investing, which may increase ESG assets in retail investing in the near future.
ASSET MANAGERS INFLUENCE
Asset managers influence the ESG characteristics of the portfolio through selection, as well as engaging with investee companies to improve their ESG performance.
While they react to asset owners’ interest in ESG, they can also play a key role in proposing new products and approaches to considering ESG.
ESG Active Listed Equities -> Fixed Income.
20 years.
Critical as performance benchmark.
Basis for passive investment funds, such as exchange-traded funds (ETFs).
ESG offerings by asset managers generally began with active-listed equities, but recently evolved
to other asset classes, especially fixed income.
The offering of indices and passive funds with ESG integration by asset managers started 20 years after that of active investments.
The use of indices is nonetheless critical for the investment industry – they are performance benchmarks and the basis for passive investment funds, such as exchange-traded funds (ETFs).
Investment consultants and retail financial advisers.
Investment consultants and retail financial advisers are investment professionals
who help institutions and individuals, respectively, set and meet long-term financial goals, usually through the proposal of investment funds.
They can consider ESG characteristics of the funds in their screening and short-listing of funds to clients.
