ESG

Question 1

ESG Bonds

Answer 1

ESG bonds are fixed-income financial instruments issued by governments, corporations, or other entities
to raise capital for projects that align with specific environmental, social, and governance (ESG) criteria.
These bonds are designed to finance initiatives that promote sustainability, ethical practices, and
responsible investing.

Question 2

Green Bonds

Answer 2

Raise funds to finance projects that have a positive environmental impact, such as
renewable energy and the green construction of buildings. For investors,
the attraction is that they allow investment that contributes to social and environmental impacts.

Question 3

Blue Bonds

Answer 3

Funds raised are to support
projects related to ocean conservation and marine projects, such as
promoting biodiversity. Attraction is the same as for green bonds.

Question 4

Impact Debt

Answer 4

Fund prevention and early intervention.
Impact debt is designed to be responsive to the needs of vulnerable groups to improve their lives.

Question 5

Social Bonds

Answer 5

Social bonds are issued for the purpose of using funds raised for projects
with positive social outcomes. The focus is, but not limited to, affordable
basic infrastructure (eg, clean drinking water, sewers, sanitation, transport),
health, education and vocational training for persons living below the
poverty line, including as a result of natural disasters.

Question 6

Sustainable Bonds

Answer 6

Sustainable bonds raise finance for a combination of both green and social
projects.

Question 7

Sustainability-Linked Bonds

Answer 7

Sustainability-linked bonds whose characteristics are tied to sustainability/
ESG initiatives.

Question 8

Positive or Negative Screening

Answer 8

Depending on a client’s values, various filters or screens may be applied. Screening involves testing a potential or actual investment against a set of responsible investment measures. Only investments that pass the various tests are considered candidates for portfolio inclusion. At a high level, when considering sustainable and ethical investing, one can either follow a ‘negative screening’ process, ‘positive
screening’ process, or both.

Question 9

Sin Stocks

Answer 9

Alcohol, tobacco, gambling, adult
entertainment, weapons manufacture.
and nuclear power-related activities.
The list has extended over the years to
include deforestation, the fur trade, and the charging of excessive interest rates (typically associated with payday loans), among others.

Question 10

De Minimis Levels

Answer 10

One challenge that can arise is determining whether a company should be excluded if part (but not all) of its operations are involved in a particular activity. To address this, de minimis levels (ie, the level of exposure to the
excluded activity deemed acceptable) may be applied to the firm’s turnover or revenue: the lower the level, the stronger the exclusion.

Question 11

ESG Factors

Answer 11

Environmental – CO2 emissions, pollution, the degradation of forests and woodland, overfishing and intensive agricultural methods, among others.
Social – this relates to human rights (eg, the use of modern slavery) and working conditions (eg, paying below the living wage), as well as corporate structures.
* Governance – companies with weak internal controls may have management
that is not following company policies, which increases the risk of irresponsible behaviours and corruption.

Question 12

SRI

Answer 12

SRI is driven first by investors’ individual values rather than investment potential. Today, one of the most important issues for SRI is shareholder engagement, whereby shareholders may enter into dialogue with management to
encourage behavioural change and address serious ESG issues, as an alternative to the formal vote on a shareholder resolution.

Question 13

Impact Investing

Answer 13

Refers to investment into companies to generate a positive environmental or
social impact, alongside a financial return. That is not to say that impact investors will not expect a decent financial return, but they are prepared to consider the positive or beneficial impact of their investment as part of their overall ‘return’

Question 14

Responsible Investors

Answer 14

Hope to better manage risk and generate sustainable, long-term returns

Question 15

Sustainable Investors

Answer 15

Focus on progressive practices, and recognise that companies solving the world’s biggest challenges can be best
positioned to grow over the long term

Question 16

Ethical Investing

Answer 16

Ethical investing is the practice of selecting investments based on ethical or moral principles. This
involves filtering out unethical companies involved in the ‘sin stocks’. At the same time, it may involve supporting ethical companies, that are making a positive contribution through their products and services.

Question 17

FTSE4Good Index Series

Answer 17

This series has been designed to measure the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate
investment in those companies. There are various indices available in this
series, covering the UK, Europe, Australia and the US as well as global indices.

Index constituents are screened for the quality and extent of certain ESG
criteria. From this, companies are assigned an ESG rating, which
must be at least 3.3 out of 5 for the company to be suitable for inclusion in
the index.

Additionally, companies with exposure to ‘significant controversies’ (eg, tobacco, controversial weapons and coal) are excluded.

The FTSE4Good Index Series is reviewed every June and December. At these
times, any companies with an ESG rating below the threshold are allowed a
12-month grace period to improve its rating before being removed from the
index, as a way of incentivising improvements in corporate practices.