Chapter 2: The ESG Market Flashcards
A brief history of sustainability. Part 1
When started and who initiated?
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
A brief history of sustainability. Part 2
What the report did?
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
Early phase of ESG
When ESG concept emerged?
In 17th and 18th created guidence of activities Quakers and Methodist are not investing in (negative screening)
Early phase of ESG
What was the first fund and development history?
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
What influenced development of SRI ?
Shareholder activism Positive screening (maximising profit within a socially aligned strategy)
What happened in 2002 ?
Sarbanes Oxley Act in response to fraud Enron scandal . Act was developed to improve corporate governance practices
What triggered modern form of ESG ?
In 2004 UN secretary Kofi Annan wrote to major CEOs to integrate ESG into capital markets - > report Who Cares Win -> term ESG
What was considered to be the greatest risk of ESG?
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%
ESG Investing in numbers
Who make the most comprehensive report about responsible investing?
Global Sustainable Investment Alliance every 2 years. Major wester countries and satelites
ESG Investing in numbers
How sustainable investing changed from 2018 to 2020
Increased from 22.8 bn (2016) to 30.6 bn (2018) in 5 major markets.
Europe has highest proportion - around 50%
Where sustainable investing decreased ?
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%
What is the largest ESG strategy in EU ?
Negative screaning, Around 11 tn usd
What is the largest ESG strategy in US ?
ESG integration - around 8 trln
In which country corporate engagement main strategy ?
Japan - 3-4 trln
How sustainable investing differ between retail and institutional investors?
Share of retail sustainable investing assets has growth to 25% from 20% in 2016
How sustainable investing differ among assets classes in major regions?
Most in equity 51%, while in fixed income 36% and other (total 100%)
Who are the main stakeholders in responsible investing ?
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
Investment value chain
What is the role of asset owners ?
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
How institutional asset owners collaborate with asset managers ?
Through investment mandate, where they define investment products, process and resources. More than 90% claim that assetm managers behave according to
What are the challenges of asset managers ?
Do not understand how to integrate ESG
Too small to influence asset managers
Asset managers dont want to integrate ESG
What are the challenges of short termism
Unwillingness to to take long-term projects (focus on short term returns)
It promotes bubbles, financial instability
Tend to ignore long-term factors: ESG
What are 3 pension fund case studies?
- HSBC Bank UK pension scheme: transitioned equity component of some funds to passive ESG funds
- Government Pension Investment Fund (Japan)
Invested in 9 ESG funds
Criteria: positive screening, public information, index providers and managers should avoid conflict of interests
- UK Environment Pension Fund - launched search of managers to manage portfolio of equities linked to long term performance (shift from short terminism)
What are the pension fund trustee?
someone who technically holds an occupational pension scheme’s assets for the beneficiaries.
How ESG risks influences insurance products
- through extreme weather condition
2. demographic changes
How insurance tackle ESG risk ?
Munich Re - heavily invest in climate change research and modeling (5-10% wind speed increase -> 0.13% GDP
Axa - > fighting with smoking
What is amount of global Souvereighn wealth fund ?
8 trln
ESG and retail investors ?
Relatively small but growing. In US 161 bn out of 22 trl
How many ESG indicies exisit
Today there are over 1000 index,
What are the challenges asset managers face to integrating ESG
No clear signal from asset owners, resources (new people, marketing procedures)
