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CISI - Portfolio Construction Theory in Wealth Management > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

What does externalisation of company costs mean? (2)

A
  • companies consume resources and create waste
  • include the costs above in price of goods
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2
Q

What does the externalisation of CO2 emissions and global warming mean?

A

Companies pay for harm caused to planet producing products and CO2

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3
Q

What are the three instruments of environmental governance?

A
  1. The UN Framework Convention on Climate Change (UNFCCC)6
  2. The Convention on Biological Diversity (CBD)7
  3. The non-legally binding Statement of Forest Principles8.
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4
Q

What are the first three principles of PRI?

A
  • incorporate ESG issues into investment analysis and decision-making processes
  • Be active owners and incorporate ESG issues into ownership policies and practices
  • Seek appropriate disclosure on ESG issues by the entities invested in
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5
Q

What the last three principles of PRI?

A
  • Promote acceptance
  • Work together to enhance effectiveness
  • Report on activities
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6
Q

How many UN Sustainable Development Goals are there?

A

17

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7
Q

What do the critics say about companies regarding UN Sustainable Development Goals?

A

the breadth and quality of data that companies provide are inconsistent or incomplete

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8
Q

Are there standardised models to assess investments against the SDGs?

A

No

Open to interpretation

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9
Q

What is the problem with SDGs being open to interpretation?

A
  • lead to oversights and a lack of consistency across the industry
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10
Q

Why do some critics say voluntary disclosures on environmental performance are ineffective?

A
  • not bound by regulation
  • not held accountable when they act irresponsibly
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11
Q

What is a motivation for ethical, responsible and sustainable investing?

A

individuals might feel they want to ‘give something back’ or have concerns for ethical or ESG issues

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12
Q

Give two reasons for ethical investing

A

Financial - ESG companies better returns

Faith - religious beliefs

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13
Q

What is included in the sextet of sin?

ATGPAN

A
  • alcohol
  • tobacco
  • gambling
  • pornography
  • armament manufacturing
  • nuclear power-related activities
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14
Q

What is negative screening for ESG investing?

A

exclude companies producing ‘undesirable’ products

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15
Q

What is a challenge of excluding a company for ESG?

A

What to do if only a part of business activity is bad

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16
Q

What is the de minimis level in ESG screening?

A

the level of exposure to the excluded activity deemed acceptable

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17
Q

How is the de minimis used in ESG negative screening? (2)

A

apply to the firm’s turnover or revenue

the lower the level, the stronger the exclusion

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18
Q

What is positive screening in ESG investing?

A

invest in firms providing positive solutions to challenges

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19
Q

What is an advantage of positive screening? (2)

A

exclude companies deemed unacceptable

include less than perfect companies that try to improve their practices

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20
Q

Give an example of a less-than-perfect company that would be included in a positive screening ESG strategy (2)

A

company that sells fur (bad)

trying to improve the practices (preserving the environment)

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21
Q

What is a negative in investing ESG style? What are the tilts in ESG?

A

restricts diversification

might tilt to certain
- size
- growth
- sectoral
- industrial production
- market

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22
Q

What is the difficulty with ethical/responsible/sustainable investing?

A

it can mean different things to different people

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23
Q

What is ethical investing?

A

the practice of selecting investments based on ethical or moral principles

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24
Q

‘responsible and sustainable investing’ represents three key investment strategies, which are…

A

ESG

SRI

Impact investing

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25
What do responsible investors hope for?
better manage risk and generate sustainable, long-term returns
26
What do sustainable investors hope for?
progressive practices and recognise that companies solving the world's biggest challenges can be best positioned to grow over the long term.
27
What does ESG stand for?
Environmental Social Justice (Corporate) Governance
28
What does the Environment part of ESG concern about?
concerns about the environemnt i.e. CO2 emissions, deforestation and pollution
29
What does the social justice part of ESG concern about?
human rights
30
What does the (Corporate) governance part of ESG concern about?
companies with weak internal controls
31
What is SRI?
SRI is broadly similar to ESG, except that SRI is driven first by investors’ individual values rather than investment potential.
32
What is impact investing?
investment into companies to generate a positive environmental or social impact alongside a financial return
33
Two types of impact investment
loans at below-market rates positive screen - companies with positive or beneficial impact
34
What is the size tilt on sustainable investing?
smaller and medium-sized companies
35
Why are more smaller companies included in sustainable investing?
typically smaller, and therefore more nimble, growth companies operating in niche areas of the market that are providing solutions to the world’s challenges
36
How does best in class help i.e. in mining sector
invest in the best (or least harmful) mining company, on the basis that such investment should encourage less responsible mining companies to do better
37
How can managers of funds influence management of companies? (2)
- encourage improvement in policies - make company less harmful
38
What are the concerns regarding managers of funds influencing management of companies?
- commitment is weak
39
How does exclusion approach reduce diversification?
- many industry sectors not permitted in ethical funds
40
What is the proposed benefit of being ethical?
companies enjoy a premium to valuation
41
Why do ethical companies get an 'uplift' in valuation?
unethical and irresponsible behaviours as markets of corporate risk
42
What are the corporate risks of being unethical? (3)
- reputation - litigation - environmental clean up costs
43
What are the intended results of influencing management of companies?
- act in a responsible way - changing nature of business - consider external factors i.e. climate change and pollution - reduce potential financial liabilities
44
What is greenwashing?
misleading environmental claims for marketing purposes with the aim of improving reputation and profits
45
What are the other types of washing? (8)
- impact washing - social washing - governance washing - rainbow washing - pink washing - blue washing - purple washing - diversity washing
46
In the corporate social repsonsibility (CSR), what is a measure of labour equality within an organisation?
a simple test that may be available might be to compare the ratio of the salary of the highest-paid member of staff to the lowest-paid
47
What are green bonds?
debt instruments for projects with positive environment or climate benefits
48
What kind of projects are included in green bonds? (3)
energy efficiency pollution prevention sustainable agriculture
49
Who typically issues green bonds?
governments and supernational organisations, as well as companies
50
What are the four components of the green bond principles?
* use of proceeds * process for project evaluation and selection * management of proceeds, and * reporting
51
What is the intended use of the green bond principles?
provide guidance on the key components involved in launching a credible green bond
52
What are labelled green bonds?
proceeds are earmarked for environmental projects been labelled as 'green' by the issuer
53
How do issuers label their green bonds if they are concerned about lack of standardisation?
They keep it unlabelled
54
Who typically issues unlabelled green bonds
pure-play companies (ie, those focusing on a single type of product or service), such as solar energy or recycling companies
55
What are 'use of proceeds' bonds?
Proceeds are earmarked for green projects, either by holding them in sub-portfolios or otherwise tracked by issuers and are backed by issuers’ entire balance sheets.
56
What are 'use of proceeds' revenue bonds?
credit exposure in the bonds is to pledged cash flows of the revenue streams, such as fees and taxes
57
What are 'green project' bonds?
issuers use proceeds to provide loans to a separate company or special purpose vehicle (SPV), which then deposits funds into those dedicated projects
58
What are 'green securitised' bonds?
these are bonds collateralised by one or more specific green projects, with bond repayments generally coming from the cash flows generated by the assets
59
What is one of the main concerns with green bonds?
lack of standardisation of what constitutes a green bond
60
What are social impact bonds (SIBs)?
finance-raising instruments designed to raise funds to achieve social objectives
61
What's the difference between impact bonds and conventional bonds?
focusing on the social benefit (ie, social impact) rather than the investment potential
62
How does repayment work for SIBs?
focus on social outcomes being met instead of a fixed return
63
What are environmental swaps?
debt swaps that allow the debtor country (usually a less developed country) to have the amount of its debt reduced by the amount that it spends on key environmental projects.
64
What is the primary purpose of environmental swaps?
reduce the debt problems of poorer countries while promoting conservation/environmental issues
65
What makes it difficult to construct an ethical/responsible/sustainable portfolio? (3)
- a lot of options to choose from - companies do not report relevant information -ESG ratings agencies do not have language skills to interpret ESG reports
66
What does the research say about companies with good environmental and social ratings? 4
historically demonstrated lower levels of systematic risk, less volatile earnings, less systematic volatility lower costs of capital compared with their lower-rated counterparts
67
How does ESG investing affect geographic diversification?
limits diversification excluding countries with poor human rights records
68
What are the competitive advantages of ethical, sustainable and responsible companies?
build a good reputation contributing to society and avoiding coercive, exploitative, or illegal practices while bringing financial reward
69
How does a good reputation help a company?
attracts customers and business partners, creating economic opportunities
70
How does strong moral principles help a company?
help limit abuses by employees tempted to circumvent regulation
71
Advantage of companies with stronger ethical/ESG reputations (2)
higher P/Eratios for their stock and borrow at lower rates in bond markets
72
What are other competitive advantages for companies with good ESG? (3) AAI
* attracting talent * anticipating changes in regulatory and business environments ahead of competitors * increasing customer and investor loyalty

CISI - Portfolio Construction Theory in Wealth Management (15 decks)

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