Chapter 2: The ESG Market

Question 1

A brief history of sustainability. Part 1

When started and who initiated?

Answer 1

In 1983 UN set up World Commission on Environment and Development (Brundtland Report) - group of experts and politicians.

Goal: proposing long term solutions for sustainable development

In 1987 Brundtan Report (Common Future) - concept of sustainable development

Question 2

A brief history of sustainability. Part 2

What the report did?

Answer 2

The report laid foundation of Rio Summit / UN Conference in 1992

Main point: business responsible do not cause harm to environment and gain legitimacy through meeting needs of society

Question 3

Early phase of ESG

When ESG concept emerged?

Answer 3

In 17th and 18th created guidence of activities Quakers and Methodist are not investing in (negative screening)

Question 4

Early phase of ESG

What was the first fund and development history?

Answer 4

In 1928 the new mutual fund was launched Based on religious tradition

Modern form of ethical exclusion began in 1971 PAX World Fund

Another waive from South Africa - The Sullivan Principles. All employees should be treated equally. This contributed to end of apartheid.

This is called as value based and considered ethical behaviour

Question 5

What influenced development of SRI ?

Answer 5

Shareholder activism
Positive screening (maximising profit within a socially aligned strategy)

Question 6

What happened in 2002 ?

Answer 6

Sarbanes Oxley Act in response to fraud Enron scandal . Act was developed to improve corporate governance practices

Question 7

What triggered modern form of ESG ?

Answer 7

In 2004 UN secretary Kofi Annan wrote to major CEOs to integrate ESG into capital markets - > report Who Cares Win -> term ESG

Question 8

What was considered to be the greatest risk of ESG?

Answer 8

Based on report Stern Report (had particular influence on industry) climate change is the greatest risk.

In Report: without acting GDP loss from climate change can range from 5% to 20%

Question 9

ESG Investing in numbers

Who make the most comprehensive report about responsible investing?

Answer 9

Global Sustainable Investment Alliance every 2 years. Major wester countries and satelites

Question 10

ESG Investing in numbers

How sustainable investing changed from 2018 to 2020

Answer 10

Increased from 22.8 bn (2016) to 30.6 bn (2018) in 5 major markets.

Europe has highest proportion - around 50%

Question 11

Where sustainable investing decreased ?

Answer 11

in EU share of sustainable investing decreased because of strick regulation of sustainable investing (since 2014) In other countries proportion increased. In australia and new zeland 63% this portion. In EU and US around 50%

Question 12

What is the largest ESG strategy in EU ?

Answer 12

Negative screaning, Around 11 tn usd

Question 13

What is the largest ESG strategy in US ?

Answer 13

ESG integration - around 8 trln

Question 14

In which country corporate engagement main strategy ?

Answer 14

Japan - 3-4 trln

Question 15

How sustainable investing differ between retail and institutional investors?

Answer 15

Share of retail sustainable investing assets has growth to 25% from 20% in 2016

Question 16

How sustainable investing differ among assets classes in major regions?

Answer 16

Most in equity 51%, while in fixed income 36% and other (total 100%)

Question 17

Who are the main stakeholders in responsible investing ?

Answer 17

Asset owners: 
Pension funds 
Insurance 
Sovereign wealth funds, endowments 
Individuals 

Asset managers

Fund promoters:
Platforms
Consultants
Fund labellers

FA (banks research, stock exchange, agencies)

Policymakers regulators government

Investees

Society academia

Question 18

Investment value chain

What is the role of asset owners ?

Answer 18

They drive value chain! Asset owner’s understanding of how ESG factors infulence financial returns and economy can drive the amount and quality of ESG investing

Question 19

How institutional asset owners collaborate with asset managers ?

Answer 19

Through investment mandate, where they define investment products, process and resources. More than 90% claim that assetm managers behave according to

Question 20

What are the challenges of asset managers ?

Answer 20

Do not understand how to integrate ESG
Too small to influence asset managers
Asset managers dont want to integrate ESG

Question 21

What are the challenges of short termism

Answer 21

Unwillingness to to take long-term projects (focus on short term returns)

It promotes bubbles, financial instability

Tend to ignore long-term factors: ESG

Question 22

What are 3 pension fund case studies?

Answer 22

1. HSBC Bank UK pension scheme: transitioned equity component of some funds to passive ESG funds
2. Government Pension Investment Fund (Japan)
   Invested in 9 ESG funds

Criteria: positive screening, public information, index providers and managers should avoid conflict of interests

3. UK Environment Pension Fund - launched search of managers to manage portfolio of equities linked to long term performance (shift from short terminism)

Question 23

What are the pension fund trustee?

Answer 23

someone who technically holds an occupational pension scheme’s assets for the beneficiaries.

Question 24

How ESG risks influences insurance products

Answer 24

1. through extreme weather condition

2. demographic changes

Question 25

How insurance tackle ESG risk ?

Answer 25

Munich Re - heavily invest in climate change research and modeling (5-10% wind speed increase -> 0.13% GDP

Axa - > fighting with smoking

Question 26

What is amount of global Souvereighn wealth fund ?

Answer 26

8 trln

Question 27

ESG and retail investors ?

Answer 27

Relatively small but growing. In US 161 bn out of 22 trl

Question 28

How many ESG indicies exisit

Answer 28

Today there are over 1000 index,

Question 29

What are the challenges asset managers face to integrating ESG

Answer 29

No clear signal from asset owners, resources (new people, marketing procedures)