Chapter Key Facts Flashcards
ESG investing is an…
approach to managing assets where investors explicitly acknowledge the
relevance of environmental, social and governance (ESG) factors in their investment decisions, as
well as their own role as owners and creditors.
The concept of ESG investing is intricately related to…
the concept of investees’ corporate
sustainability. Related to this, corporate social responsibility (CSR) is a broad business concept that
describes a company’s commitment to conducting its business in an ethical way.
All forms of responsible investment, except for (BLNAK), are ultimately related to portfolio
construction
engagement
One of the main reasons for ESG integration is recognising that responsible investment can reduce
risk and enhance returns. Financial materiality can be due to:
a. reduced cost and increased efficiency;
b. reduced risk of fines;
c. reduced externalities; and
d. improved adaptability to sustainability megatrends.
Evidence of the risks that ESG megatrends carry is illustrated by the…
World Economic Forum’s Global
Risks Report,28 which for many years now has highlighted the growing likelihood and impact of
extreme weather events and the failure to address climate change.
There is a growing recognition in the financial industry and in academia that ESG factors do
influence financial performance. An analysis of over 2,000 academic studies on how ESG factors
affect corporate financial performance found …
‘an overwhelming share of positive results,’ with just
one-in-ten showing a negative relationship.
The
modern interpretation of fiduciary duty, put forward in the Freshfields report, recognises…
that failing
to consider long-term investment value drivers – which include ESG issues – in investment practice is
a failure of fiduciary duty.
Large institutional investors, known as…
universal owners.
Their investment returns are thus dependent on the overall economy. A reason for implementing ESG stems from the recognition that negative megatrends will, over time, create drag on economic prosperity and may increase instability both within countries and between the ‘global north and south’.
A reason for practicing responsible investment is the belief that some investors…
serve society alongside providing financial return. The UN
Sustainable Development Goals (SDGs), a framework agreed by all UN member state governments
to work towards aligning with global priorities, has been adapted by some
Client demand is instrumental for responsible investment because they make the decisions
about how their assets, representing…
on average around 34% of gross domestic product (GDP) in
Organisation for Economic Co-operation and Development (OECD) countries
Institutional investors typically reflect ESG considerations by incorporating ESG factors into
investment decision-making, through corporate and policy engagement
a. within their investment mandates;
b. within their strategic asset allocation process;
c. by applying a filter based on ratings;
d. by integrating ESG issue(s) into financial models; or
e. by using ESG factors to identify investment opportunities.
The UN hosts or sponsors various initiatives which drive sustainability and ESG investing…
The PRI provides a broad range of tools and reports on best
practice for the various actors in the investment value chain. Over recent years, the growth of the
ESG market and the increased use of the term ‘ESG’ has been highly correlated to the growth in PRI
membership.
The Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) takes the
Paris Agreement’s 2°C (3.6°F) target and tries to operationalise it for the business world
It should also
drive a substantial advance in disclosures by seeking transparency about realistic scenario planning
the concept of sustainable development was introduced in X By x
1987, a Commission put together by the UN issued the Brundtland Report, also called Our Common
Future,
The modern institutionalisation of
ethical exclusions arguably began at the height of the Vietnam War in 1971
with the establishment of the
Pax World Fund, the first ethical mutual fund.
UN Global Compact’s report Who Cares Wins encourages financial institutions to
integrate ESG into capital markets. Concurrently, the UNEP FI produced the so-called Freshfields Report,
which showed that ESG issues…
are relevant for financial valuation and thus, fiduciary duty. These two reports formed the backbone for the launch of the PRI
The Global Sustainable Investment Alliance’s (GSIA) most recent report shows sustainable investing
assets in the five major markets stood at..
US$30.7 trillion (£23.7tn) at the start of 2018, a 34% increase in
two years.
interest by retail investors in
responsible investing has been steadily growing; in 2018
1/4 of all assets
Most ESG assets are allocated to public equities, over 50% - FI is second with
36% (~1/3)
Shorttermism may leave companies less willing to take on projects
that may take multiple years – and patient capital – to develop
Insurers are by nature
sensitive to certain aspects of ESG due to factors impacting insurance products,
such as the frequency and strength of extreme weather events
In theory, asset owners with long-term liabilities (like pension funds) are well aligned with long-term
investing and are due to benefit from it.
No true in practice
The adoption by retail investors has been generally slower than that of institutional investors
millennials are interested in ESG investing, which may increase ESG assets in
retail investing in the near future.
Over 90% of the new or revised policies were developed after…
2000, driven by the rapid development
in Europe and Asia, as well as the rise of stewardship and corporate governance codes, with national
authorities introducing or periodically strengthening ESG expectations.
Investors can contribute to the growth of ESG investing by ..
how they manage ESG
risks, the impact they have on the environment and society, and the level of disclosure they provide on
these matters.
Some investors still question..
whether considering ESG issues can add value to investment decisionmaking
whether their fiduciary duty allows them to implement ESG investing
Both have evidance to the contrary
what could limit ESG growth
Lack of understanding of how to implement ESG in the different phases of the investment process
The rise of funds labelled ESG also increased the risk of..
‘greenwashing’. Further work by regulators
combined with the development of voluntary market standards would make it easier for investors to
understand the characteristics of responsible investments and the differences between different types of
responsible investment, helping to build trust in the market.
The range of environmental factors that have a material impact on investments are broad and farreaching.
These include, but are not limited to:
a. climate change;
b. natural resources (including water, biodiversity, land use and forestry and marine resources);
c. pollution, waste and circular economy.
The Paris Agreement of 2015 (COP21), was reached to mobilise a global response to the threat of
climate change and growing concern reported by scientific experts
The Paris Agreement is not legally
binding under international law, but it provides a mechanism for countries to make more ambitious
emissions reductions pledges every five years
Putting a price on carbon emissions is seen by many economists as one of the most effective
methods of tackling climate change
arbon pricing and emissions trading certificates were trialledin the UK in the early 2000s, and the EU subsequently established the European Union EmissionsTrading System (ETS) in 2005. Carbon markets are steadily growing around the world. The wider
application of putting a price on carbon also reads across to other financial mechanisms, such as
fuel duties.
There is increasing pressure on water and land use as access to natural resources become less
secure.
Threats to nature and the drive and pressure behind these threats because of agricultural
practices and over-exploitation remain the biggest threats to biodiversity and ecosystems.
Clean air is essential to health, the environment and economic prosperity; but
there is growing
concern about indoor and outdoor air pollution (now responsible for more than 10% of all deaths
globally). Waste and waste management, given the strain on natural resources, have become
increasingly large priorities for policymakers and business.
Material environmental issues are factors that could have a significant impact
both positive
and negative – on a company’s business model and value drivers, such as operating and capital
expenditure, revenue growth, margins and risk.
Environmental risks can be effectively integrated into company analysis and investment decisionmaking
processes, using various financial tools and models.
The types of risk analysis tools and
associated metrics primarily depend upon the asset classes and risk types financial institutions are
exposed to
there is an increasing number of policy initiatives at both country
and regional level to promote the economic and financial mainstreaming of climate change and
environmental factors
he European Commission is now working, as a key element of its
sustainable finance action plan, on measures to make more transparent how investors integrate
sustainability into their decision-making process more transparent
Efforts by investors to assess the financial impacts caused by environmental risks have begun to
increase in terms of their analytical scope and sophistication.
Various approaches include carbon
footprinting and climate scenario analysis based on the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD).
