Chapter 2 - The ESG Market Flashcards
Shareholder Rights Directive (SRD)
Issued by the European Union (EU) in September 2020, requiring investors to be active owners and to act with a more long-term focus. The SRD II raises expectations about the level of stewardship carried out by investors.
Challenges limiting the Development of ESG
- limited expertise
- quality of data research and analysis
- limited tools to help with portfolio construction
Greenwashing
Misleading claims regarding ESG investment strategies.
Negative Screening
Deliberately opting not to invest in companies or industries that do not align with values.
How can Investment Mandates influence ESG investing?
Investment mandates define expectations around the investment product. Most asset owners that are signatories of the PRI require asset managers to act in accordance to the asset owner’s Responsible Investment beliefs, and also report on agreed Responsible Investment activities.
Likely reason for a Pension Fund Trustee to consider ESG investing
(3 Points)
- trustee acting in the interest of pension fund members when they have a stated interests in social and environmental impact
- trustees with fiduciary duty to consider factors financially material to long term returns
- risk of legal action by not managing climate change risks
Brundtland Report
(3 Points)
In 1987, the WCED commission issued the Brundtland Report, also called Our Common Future, which introduced the concept of sustainable development: “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” The Brundtland Report also described how sustainable development could be achieved.
Asset Manager Engagement
Influences ESG characteristics of the portfolio and by engaging with the company and proposing products and approaches to considering ESG.
History of Responsible Investing
17th-18th century: Religious Groups did ethical investing.
1928: Pioneer Fund, first ethical mutual fund based on religious traditions.
1971: Pax World Fund, opposed to production of nuclear or military arms.
World Commission on Environment and Development (WCED)
In 1983, the United Nations (UN) General Assembly, assembled WCED, which is an international group of environmental experts, politicians, and civil servants. The WCED was charged with proposing long-term solutions for sustainable development. In 1987 the WCED issued the Brundtland Report, also called „Our Common Future“.
Rio de Janeiro Earth Summit
(3 Points)
The Brudtland report laid the foundations for the Rio de Janeiro Earth Summit, also known as the Rio Summit or the UN Conference on Environment and Development (UNCED), held in 1992, which ultimately led to the creation of the UN Commission on Sustainable Development that same year.
The Sullivan Principles
In the late 1970s, the divestment movement became increasingly globalized through the divestment campaign in protest of South Africa’s system of apartheid. The Sullivan Principles required to ensure that all employees, regardless of race, are treated equally and in an integrated environment as a condition for investment.
Sarbanes–Oxley Act
(4 Points)
- established in 2002 in the United States
- fraud at Enron Corporation and other companies resulted in an increasing emphasis on the importance of good corporate governance and in specific regulations
- lifted expectations for greater integrity in financial reporting
- created the Public Company Accounting Oversight Board (PCAOB) as the countries audit standard setter
“Who cares wins”
(3 Points)
Modern form of ESG investing began with a letter and call to action. In January 2004, UN secretary-general Kofi Annan wrote to the CEOs of significant financial institutions to take part in an initiative, under the authority of the UN Global Compact and with the support of the International Finance Corporation (IFC), 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”. The report made the case that embedding ESG factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies.
Freshfields Report
The UN Environment Programme Finance Initiative (UNEP FI) produced the so-called Freshfields Report, which showed that ESG issues are relevant for financial valuation and, thus, fiduciary duty.
What formed the backbone for the launch of the Principles for Responsible Investment (PRI) at the New York Stock Exchange in 2006?
The Freshfields Report and the “Who cares wins” Report by the UN secretary-general Kofi Annan.
The Stern Review
The Stern Review on the Economics of Climate Change, was a particular influence on the investment industry. At the request of the UK government, economist Nicholas Stern led a major review of the economics of climate change to understand the nature of the economic challenges and how they can be met. The report, published in 2006, concluded that climate change is the greatest and widest-ranging market failure ever seen, presenting a unique challenge for economics, and that early action far outweighs the costs of not acting. Stern has argued that moral considerations warrant the use of a low discount rate when assessing future climate damages, in order to place adequate value on the lives and welfare of future generations.
What are the 3 themes that Regulations generally involve?
- corporate disclosure
- stewardship
- asset owners
What are the conditions for an acitivity to be considered Environmentally Sustainable under the EU Taxonomy Regulation framework?
- contributing substantially to at least one of the six environmental objectives
- “doing no significant harm” to any of the other environmental objectives
- complying with minimum, EU-specified, social and governance safeguards
Name the 6 Environmental Objectives of the EU Taxonomy
(6 Points)
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
EU Sustainable Finance Disclosure Regulation (SFRD)
(5 Points)
Published in December 2019:
* requirements to promote environmental and social risks affeting investments
* “principle adveres impacts” - negative impact on environmental and social issues from investment decisions
* enhance transparency of sustainably invested products to prevent green washing
* SFDR has broader scope then TCFD
Asset Owners in Responsible Investment
(7 Points)
Asset owners include:
* pension funds
* insurance companies
* sovereign wealth funds
* foundations
* endowments
They generally invest their assets in an investment vehicle with the goal of getting returns from the invested capital.
They seek to maximize returns at a given level of risk, and some derive utility from non-financial impacts as well.
