(ESG) and Ethical Investing

Question 1

ESG Integration

Answer 1

• ESG integration evaluates risks and opportunities associated with Environmental (E), Social (S), and Governance (G) factors that are material to a company or market.
  
  • The main driver of ESG integration globally has been client demand.

Question 2

Impact Investing

Answer 2

A subset of ESG that focuses on investments in companies, organizations, and funds with the aim of generating positive social and environmental impact while achieving financial returns.

Question 3

ESG in EMEA (Europe, Middle East, and Africa) Reports – Key Findings

Answer 3

1. No “one-size-fits-all” approach – No universal or best method for ESG integration.
   
   2. Governance (G) is the most integrated ESG factor among investors.
   3. Environmental (E) and Social (S) factors are gaining recognition, but adoption is still limited.
   4. ESG is more integrated in equity markets than in fixed income.
   5. Portfolio managers and analysts are integrating ESG into decision-making but rarely adjust financial models accordingly.
   6. Main drivers of ESG integration:
      * Risk management
      * Client demand
   7. Main barriers to ESG integration:
      * Limited understanding of ESG issues
      * Lack of standardized ESG data

Question 4

UNPRI (United Nations Principles for Responsible Investment)

Answer 4

1. Incorporate ESG issues into investment analysis and decision-making.
   
   2. Act as active owners, integrating ESG into ownership policies.
   3. Seek appropriate ESG disclosures from invested entities.
   4. Promote ESG acceptance and implementation across the investment industry.
   5. Collaborate to improve ESG effectiveness.
   6. Report on ESG-related activities and progress.

Question 5

Issues with ESG Integration

Answer 5

Fiduciary Duty
A legal responsibility to act in the best interests of clients/beneficiaries.
* Two key principles:
* Loyalty: Manage funds for beneficiaries’ benefit.
* Prudence: Invest with care, skill, and diligence like a prudent investor.
* Historically, fiduciary duty was seen as profit-maximization only, discouraging responsible investment.

Question 6

Challenges Perceived with ESG

Answer 6

Limits investment opportunities (restricts investable universe).
* Perceived as too risky.
* Liquidity concerns (difficulty in quickly buying/selling ESG assets).

Question 7

ESG & the Trillion-Dollar Market Failure

Answer 7

There is a massive unmet investment need, especially in climate change adaptation and mitigation.
* Climate/green bonds provide a potential solution.
* Investors face a low-return environment but still seek ESG-friendly products.
* Impact bonds: Some or all financial returns are linked to environmental outcomes.
* Green bonds help address fiduciary duty concerns (liquidity and risk).

Question 8

Climate & Green Bonds – Key Issues

Answer 8

Lack of correlation between ESG scores – Different rating providers assess ESG factors differently, leading to inconsistencies.
* Discrepancies in ESG ratings – Low correlation across ESG rating agencies makes comparison difficult.

Question 9

Criticisms of ESG Investing

Answer 9

1. Disclosure Limitations & Lack of Standardization – No universal ESG reporting framework.
   
   2. Company Size Bias – Larger companies tend to receive higher ESG scores.
   3. Geographic/Disclosure Bias – ESG ratings often reflect disclosure practices rather than actual performance.
   4. Industry Sector Bias – ESG scoring varies significantly between industries.
   5. Inconsistent Ratings – Different ESG providers weigh E, S, and G factors differently.

Question 10

Universal Owners:

Answer 10

Investors must act in beneficiaries’ interests without ignoring broader financial, social, and environmental considerations.

Question 11

Stewardship Codes:

Answer 11

Soft law frameworks encouraging investors to engage with companies on ESG-related matters.