Chapter 31 - ESG Flashcards
what is sustainability?
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
This definition is key because it is broad
what can we say about traditional finance andecoenomics in regards to sustainability?
They did not account for any of it. There are several reasons for this:
1) Most theories were developed during a time when the focus was on industrial growth, and environmental resources seemed abundant
2) Lack of intergenerational accounting: Future profits were often discounted heavily, deminishing their importance in decision making
3) Inadequate predctive models. Inability to predict long term environemntal impacts
4) Externalities: environmental costs are not accounted for in private transactions
WHats wrong with CAPM in relation to this shit?
One time period model. Does not account for intergenerational shite
What is an externality?
A consequence of an industrial or commercial activity which affects other parties, but is not reflected in market prices.
Typical example: Pollution. Classical example of profits vs environemtal impacts that hits society.
Types of externalities?
Positive and negative.
Positive: A company funds research that suddenly increase life value of many people
What is the neoclassical way of considering externalities?
They realized that externalities are not included in the market prices, which means market failure. Therefore, they argue that the goverment needs to interfere to create an efficient market.
For instance, carbon tax.
The goal is to maximize the general welfare of society.
Issue with positive externalities?
Free rider problem, public good problem.
What is a public good?
A public good is a good thati s made available to all memebers of society, and it is not possible to exclude any.
the cause is “no well defined property rights”. FOr instance, a company makes a product that makes the air more clean for EVERYONE to breathe.
What is the real, ultimate, problem of externalities?
WHO bears the costs and risks?
There is no theory on how this should be properly done in finance.
Elaborate on the framework for managing sustainable development
3 levels.
1) Financial returns and risk (F)
2) Impact on society (S)
3) Impact on environment (E)
What can be considered the “first step” towards sustainable finance?
Maximizing profits as usual, but avoiding the obvious, and sometimes less obvious, bad picks. For instance, not investing in child labor etc.
What is the second step towards sustainable finance?
Main difference is that now, instead of maximizing value for shareholders or investors, we are now looking at STAKEHOLDERS. Of course, stakeholders are everyone who is affected. This becomes a medium-term horizon focus, and the externalities are INTERNALIZED.
This is the total value to society that consists of all kinds of gains
What is the “final” (utopian) step towards sustainable finance?
All value is about common value. Long term focus. Maximize societyal walfare
Elaborate on the 3 phase framework
Are sustainability initatives value destroying?
Can be. we might lose risk-calculations.
however, it all depends on the concept of what “value” is. Financial value vs societal value etc
Benefits of sustainability for firms
May lead to:
Obtaining better resources
Higher quality employees
Better marketing of products and services
Risk mitigation (againsint things like climate change)
NB: the litterature is very conflicted on this. Some say that sustainability benefits, some say it doesnt
Elaborate on double materiality
Financial materiality refers to issues that impact a company’s financial performance and risk profile.
Double materiality: Includes financial materiality, and also environmental and social materiality. It is about how the company affects socity.
So, financial materiality is how environment affects company, and double materiality reverse this as well.
Why is double materiality important?
Companies are required to report on it
elaborate on physical and transition risk
Elaborate on supranational entitites?
elaborate on goverments
elaboratye on corporation
elaborate on consumers
all in regards to sustainability
paris agreement etc. Developing broad agreements that set some sort of direction. These are not mandatory to follow though.
GOVERNEMNT :it is their task to implement regulations and standards to INTERNALIZE externalities. Using for instance taxes on carbon etc.
Corporations: The thing is that it is not enough with governemnts ant that. We need corporations to contribute
Consumers also have responsibilities if we want to meet the UN goals
elaborate on functions of finance in sustainable future
Mobilizing capital: Direct capital towards sustainable projects
Influence corporate behavior: shareholders can exert pressure on corporate to go green etc
risk management:
innovation of financial products: developing financial insturments that incentivice sustainable businesses
what is EU ETS?
EU Emission trading system
what is ESG?
A FRAMEWORK that hrlps understand how the business does shit. it is a set of criteria.
The idea is to take a holistic view that extend beyond environment
People rate comapnies based on it
