ESG Ch. 1 INTRO Flashcards
ESG investing is an approach to managing assets where investors explicitly acknowledge the relevance of ..
(ESG) factors in their investment decisions, as well as their own role as owners and creditors, with the long-term return of an investment portfolio in mind.
Name Enviromental Factors
These are the factors pertaining to the natural world. These include the use of, and interaction with, renewable and non-renewable resources (e.g. water, minerals, ecosystems and biodiversity). ie Climate change, water, pollution
What are Social Factor
These are the factors that affect the lives of humans. The category includes the management of human resources, local communities and clients. ie human rights, slavery, work conditions
What are Gov. Factors
These are the factors that involve issues inherent to the business model or common practice in an industry, as well as the interest of broader stakeholder groups. ie corruption, pay, baoard diversity
What is CSR
The concept of ESG investing is closely 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
CSR led to the theory of
triple-bottom line
accounting - three Ps (People, Planet, Profit)
Effective management of the company’s sustainability can:
▶ reaffirm the company’s license to operate in the eyes of governments and civil society;
▶ increase efficiency;
▶ attend to increasing regulatory requirements;
▶ reduce the probability of fines;
▶ improve employee satisfaction and productivity; and
▶ drive innovation and introduce new product lines.
Responsible investment is a strategy and practice
to incorporate environmental, social and governance (ESG)
factors into investment decisions and active ownership. It considers both how ESG might influence the riskadjusted
return of an asset and the stability of an economy, as well as how investment in and engagement with
assets and investees can impact society and the environment.
Socially responsible investment (SRI) refers to
approaches that apply social and environmental criteria in evaluating companies.
SRI generally score companies using a chosen set of criteria, usually in conjunction with sector-specific weightings - can be used in combination with best-in-class investment, thematic funds, high-conviction funds or quantitative investment strategies.
Best-in-class investment involves selecting only
the companies that overcome a defined ranking hurdle, established using ESG criteria within each sector or industry. Due to its all-sector approach, best-in-class investment is commonly used in investment strategies that try to maintain certain characteristics of an index
Sustainable investment refers to the selection
assets that contribute in some way to a sustainable economy, i.e. an asset that minimises natural and social resource depletion - could also mean a strategy that screens out activities
Thematic investment refers to selecting companies
fall under a sustainability-related theme, such as
clean-tech, sustainable agriculture, healthcare or climate change mitigation - not all thematic are considered RI (dependant on ESG characterisitics)
Green investment refers to allocating capital to assets that mitigate
▶ climate change;
▶ biodiversity loss;
▶ resource inefficiency; and
▶ other environmental challenges.
Social investment refers to allocating capital to
assets that address social challenges. These can be products that address the bottom of the pyramid (BOP - thiers of social wealth) - could include immpact bonds
Impact investing refers to investments made with the specific intent
of generating positive, measurable social and environmental impact alongside a financial return (coulld be below, at or above market returns) could be in EM or DM
Ethical/value-driven and faith-based investment
refers to investing in line with certain
principles, usually using negative screening to avoid investing in companies whose products and services are deemed morally objectionable by the investor
Shareholder engagement reflects
active ownership by investors in which the investor seeks to influence a corporation’s decisions on matters of ESG, either through dialogue with corporate officers or votes at ashareholder assembly
Shareholder engagement efficacy usually depends on
▶ the scale of ownership (of the individual investor or the collective initiative);
▶ the quality of the engagement dialogue and method used; and
▶ whether divestment is known to be a possible sanction.
One of the main reasons for ESG integration is recognising that ESG investing
is Finacialy material - it can reduce risk and enhance returns, as it considers additional risks and injects new and forward-looking insights into the
investment process.
ESG integration may therefore lead to
A. reduced cost and increased efficiency;
B. reduced risk of fines;
C. reduced externalities; and
D. improved adaptability to sustainability megatrends.
A. Efficiency and productivity
Research conducted by McKinsey found that resource efficiency can affect operating profits by
as much as 60%, and that more broadly, resource efficiency of companies across various sectors is
significantly correlated with the companies’ financial performance.
Another study showed that companies experience an average internal rate of return of 27% to 80% on their low-carbon investments.
attract and retain quality employees, and enhance
employee motivation and productivity overall. Employee satisfaction is positively correlated with
shareholder returns. ( 2.3 to 3.8%pa over peers over 25yrs)