ESG Flashcards
Exclusionary screening
- avoiding securities from companies on the basis of traditional moral values
- can become a legal obligation
Best in class selection
- selecting a company’s securities because that company has improving ESG performance than its peers
- aka positive alignment
Active ownership
Investors entering a dialogue in ESG issues or exercising ownership rights with companies to actively effect change.
Thematic investing
Investing based on trending ESG issues.
Impact investing
Investing with the disclosed intention to gain social and environmental benefits together with financial return
ESG integration
- most popular
- systematic and explicit inclusion of ESG risks and opportunities in investment analysis.
Why are investors increasingly taking ESG issues into consideration
- to help manage investment risk
- because clients/investors demand it
Why ESG issues don’t get sufficient consideration in decision making?
- **difficult to assign a monetary value ** to ESG
- ESG related disclosure by companies may be limited, unverified and non-standardized
- ESG issues tend to influence financial performance in the long term, whereas investors have short term horizons
Investors who don’t take these into consideration would do it if:
- there was more demand from clients/investors
- they believed that ESG issues were material to financial performance
Value based ESG
: investors see ESG issues solely as economic risks and opportunity
- a source of economic value
- looks at ESG to compliment traditional financial analysis
Values-based ESG
: investors see ESG as not just risks and opportunities but also as a matter of moral values
- investors won’t be complicit in actions they don’t agree with
- regardless of the economics they may find certain investments unacceptable
