Chapter 7: ESG Analysis Valuation and Integration Flashcards
7 reasons why investors integrate ESG
Aims and objectives include:
1) meeting requirements under fiduciary duty or regulations,
2) meeting client and beneficiary demands,
3) lowering investment risk,
4) increasing investment returns,
5) giving investment professionals more tools and techniques to use in analysis,
6) improving the quality of engagement and stewardship activities,
7) lowering reputational risk at a firm level and investment level
How can AI and ML help in ESG data analysis?
Much of the ESG data available on companies is unstructured; AI and ML can bring structure and numerical value to part of t he unstructured dataset.
NLP may be able to accurately extract information and insights contained in the documents as well as categorize and organize the documents themselves.
Challenges to ESG integration
1) Disclosure and data-related challenges
2) Comparability difficulties
3) Materiality and judgment challenges
Criticism for ESG integration
Four primary concerns:
1) Too inclusive of poor companies
2) Dubious assessment criteria
3) Quality of data
4) Lack of emphasis on long-term improvements
What are the three main ESG risks impacting bonds?
The direct physical infrastructure impact of climate change, corporate scandals, and the importance of human capital.
How would an ESG factor impact a bond price but not an issuer creditworthiness?
An ESG factor might not be considered to affect bankruptcy risk.
When did S&P roll out ESG as part of its credit assessments?
They did so in 2019, the same year as the World Bank launched its Sovereign ESG database.
Explain why the G factor remains the more important to credit investors than E and S.
Credit investors care about the downside risk rather than the opportunity risk. They view fraud prevention and governance as important factors in protecting from downside risk.
What do the elements of ESG integration include?
The elements of ESG integration include the following:
1. adjusting forecast financials
2. adjusting valuation models or multiples
3. adjusting credit risk and duration
4. managing risk
5. ESG factor tilts
6. ESG momentum tilts
7. strategic asset allocation
8. tactical asset allocation
9. ESG controversies and positive ESG events
The typical stages of an integrated ESG assessment are
research, valuation, and portfolio construction
Risk mapping
Risk mapping means mapping a portfolio or investable universe against a specific ESG risk (e.g., climate risk or water-related risks). Examples of risk-mapping methodologies include carbon footprinting or testing portfolios against different climate scenarios.
