ESG integrated Portfolio construction and management

Question 1

MVO Mean-variance optimization

minimum standard deviation

Answer 1

link to ESG issues:

model is highly sensitive to baseline assumptions

highly dependent on historical data

volatility as a proxy for risk does not work well in cases of fat tails risk and large market swings

outputs to reflect ESG issues:
ESG issues could impact on assumptions regarding exp(r), volatility, and correlation at the asset and sub-asset class level.

-also have the potential to expand the regional and asset class mix and to add new sub-asset classes to align with the pursuit of positive real-world impact

Question 2

Factor risk allocation

Answer 2

ERP

link to ESG issues:
the macroecnomic links to ESG issues are more difficult to quantify with precision from a purely top-down perspective.

Market risk factors can be built from the bottom-up using asset and sector level analysis

outputs to reflect ESG issues:
ESG issues could require a change to baseline factor risk assumptions.
Offer the potential to build in new ESG-related risk factors to improve diversification.

Question 3

Total portfolio analysis TPA

Answer 3

SIMILAR TO factor risk model, but closer review between strategy setting process and alignment of investment goal.

link to ESG issues:
TPA is relevant to consider ESG issues that require the interplay between judgement about the future and quantitative analysis.

Require specialist knowledge to make informed judgments about future risk

outputs to reflect ESG issues:
TPA’s emphasis on risk budgeting and allocation of capital to opportunities within that budget would provide greater flexibility to capture the potential winners and losers in scenario analysis that also incorporate ESG-related issues

Question 4

Dynamic asset allocation DAA

Answer 4

driven by changes in risk tolerance, typically induced by cumulative performance relative to investment goals or an approaching investment horizon.

link to ESG issues:
DAA could introduce an additional source of estimation errors due to the need for dynamic rebalancing.

outputs to reflect ESG issues:
DAA has the potential to reflect changes in baseline assumptions over different time horizons.

Question 5

Liability driven asset allocation

Answer 5

LDI seeks to find the most efficient asset class mix driven by a fund’s liabilities.

potential link to ESG issues:
LDI encounters the same limitations as MVO, with high sensitivity to baseline assumptions

outputs to reflect ESG issues:
Some ESG issues could potentially impact on inflation and alter liability assumptions

Question 6

Regime switching models

Answer 6

it abrupt and persistent changes in financial variables due to shifts in regulations, policies and other secular changes.
Captures fat tails, skewness and time-varying correlations.

potential link to ESG issues:
regime switching approaches are relevant for considering ESG issues where an abrupt shift is expected over time. It is also typically based more on forward looking rather than historical data.

outputs to reflect ESG issues:
These approaches have the potential to capture dramatic shifts in the investment environment.
Models are not yet widely utilized by investment practitioners.

Question 7

most promising approaches maybe the BLM black-litterman asset allocation model

Answer 7

anchored by the global equilibrium market and not requiring return estimates for each asset class, it can argueably better accommodate areas like pricing climaite risk.

Question 8

portfolio risk can be divided into two portfolios:

Answer 8

1. the isolated risk of the individual asset or individual investment strategy
2. the correlation risk that emerges from the combination of all the assets and strategies

Question 9

trade-offs with allocating the risk budget to sustainability-aligned assets and strategies

Answer 9

no ESG components - 0% sustainable

ESG components that can be managed sustainably
+ non-esg components for those that cannot be managed sustainably <100% sustainable but fully diversified

ESG components that can be managed sustainably
+remove components that cannot currently be fully sustainable - approaching 100% sustainable but reduced diversification

All ESG components - 100% sustainable

Question 10

climate change/risk has emerged as the most material ESG factor for institutional investors to address within asset allocation strategies

Answer 10

both systemic and local

Question 11

macro-economic climate consideration by asset class

Equities

Answer 11

SAA/ALM Implications

• hedge against inflation which can result from supply shock and high government spending
• sensitive to growth, macro-economic performance

climate change consideration
- sensitive to climate impacts on macro-economic perforance

Question 12

Fixed income

Answer 12

SAA/ALM implication

• sensitive to interest rates
• typically less volatile returns

climate change consideration

• sensitive to fiscal policy related to climate challenges
• sensitive to climate- related impacts on issuers’ creditworthiness
• many climate impacts fall within the tenor of long-term debt

Question 13

Alternative investment

Answer 13

SAA/ALM implication

• attractive for diversification and for low or inverse correlation to market returns
• heterogeneous and wide-ranging risk/return profiles

climate change consideration

• diversification offered by alternative assets may allow for greater hedging of climate risk
• climate risk exposure may be concentrated, opaque or difficult to assess

Question 14

Task Force on Climate-related Financial Disclosures TCFD framework

Answer 14

climate scenario analysis is as important in the wider asset allocation process as it is in understanding the micro, macro and ESG sensitivities within a single investment portfolio.

the asset allocator would work to sensitize the portfolio against different warming scenarios using the 1.5c as promoted in the paris agreement 2015 as a baseline.

Question 15

physical risks

Answer 15

represent the physical risks manifested by climate change that may impact businesses’ operations, strategy, infrastructure, workforce or markets.

Question 16

Transition risk

Answer 16

risks represented by legal, regulatory, policy, technology and market change in the transition to a low carbon economy.

Question 17

driving both national and corporate commitments towards Paris-aligned net zero carbon emission targets

Answer 17

with regard to forward-looking data to describe the shape of the transition - is leading to an improved understanding for portfolio management analysis.

Paris Aligned Investment Initiative PAII
is a European asset owner-coordinated and led initiative working to develop methodologies and assessment tools related to aligning investment portfolios to Paris Agreement.

Transition Pathway Initiative TPI
is a global, asset-owner driven, asset-manager supported initiative developed in partnership with the Grantham Research Institute on Climate Change and the Environment at the London School of Economics.

utilize forward-lookinig carbon metrics to measure and determine companies’ pathways relative to 3 benchmark scenarios defined by the Paris Agreement. Under TPI, companies are measured in 2 ways:

1. the quality of companies’ governance and mgmt of their greenhouse gas GHG emissions
2. carbon emission relative to international targets and national commitments as defined by the Paris Agreement.

Net Zero Asset Owner Alliance
- a group of international asset owners who have committed to achieving emissions neutral investment portfolios by 2050.
Net Zero Asset Mangers Initiative

Net Zero Company Benchmark
engages with the world’s largest corporate greenhouse gas emitters to drive action
The benchmark assesses corporate climate commitments based on publicly-available information to understand alignment to climate priorities and to support investor engagement action.

Question 18

IPR Inevitable Policy Response

Answer 18

assumes that, in the current environment where the policy response to climate change is inadequate

Question 19

Mercer and Ortec Finance approaches

Answer 19

Mercer - extends it climate-informed asset allocation process to sustainability-themed equity, private equity and real assets, including natural resources and infrastructure.

Ortec Finance -
integrates climate risks into financial scenarios, which include transition, physical and extreme weather impacts and pricing dynamics to cover all asset classes.

Question 20

Approach for modelling the investment impacts of climate change

Answer 20

1. climate change modelling and literature review
2. risk factors and scenarios
3. asset sensitivity
4. portfolio implications
5. portfolio implementation

Question 21

in near term simulation 2020-2024

Answer 21

climate transition risks point to lower expected investment returns relative to the Paris-aligned pathways

Paris Orderly Transition gradually prices in lower earnings expectations across the 2020-2024 period, a Paris Disorderly Transition represents an earnings correction that produces a shock in 2024 and higher subsequent volatility.

Question 22

later-term simulation 2025-2029

Answer 22

avg. inv. return in an orderly transition is similar to the climate-uninformed baseline where transition risk and physical risks are not modelled.
in contrast, both the Paris Disorderly and Failed Transitions point to lower expected investment returns.

Question 23

Paris Disorderly Transition pathway

Answer 23

the sentiment shock occurring in 2025 and subsequent increase in volatility remain until 2026

Question 24

Paris Failed Transition pathway

Answer 24

characterizing a business-as-usual-scenario that bring about a 4C temperature increase by 2100- leads to diminishing inv. returns as the impact of physical risk increases.

Question 25

due diligence focuses on establishing baseline metrics to evaluate and compare managers. Metrics may include:

Answer 25

- the existence of an ESG policy - affiliation with investor initiatives, such as the Principles for Responsible Investment PRI - Accountability in the form of dedicated personnel and committee oversight - the manner and degree in which ESG is integrated in the inv. process - ownership and stewardship activities - client reporting capabilities

Question 26

``` Incorporating ESG into the manager selection process Sourcing evaluation approval on-going monitoring ```

Answer 26

Sourcing - maintain a view on 'best practices' demonstrated by market leaders in the hedge fund space - seek to identify market leaders within each individual hedge fund strategy peer group Evaluation - include ESG questions within its qualitative evaluation of a hedge fund manager during the initial meeting - assess key areas of ESG integration as it pertains to a manager's: investment philosophy investment strategy investment process team structure Approval - proprietary ESG scoring included in the manager tear sheet and reviewed by Manager Approval Group (MAG) - ESG considerations noted in due diligence check list - ESG policy reviewed - Will not investment if the MAG determines that a material and relevant ESG risk cannot be sufficiently understood or qualified Ongoing Monitoring - research maintains an ESG score based on ongoing reviews - risk team coordinates with relevant BlackRock teams to evaluate funds relative to various ESG criteria - Operational Due Diligence requests updates on the ESG policy & approach in its quarterly monitoring process - ESG considerations added to BAA's qualitative heat map

Question 27

multi-manager and FOF platforms are increasingly integrating their own ESG capabilities into more formal scoring frameworks

Answer 27

- for some platforms, these frameworks represent a spectrum of capabilities across diff. strategies - for more sophisticated platforms, these frameworks have gone beyond simply informing the manager selection process to now acting as a formal factor or weight in the overall manager selection and allocation process

Question 28

ESG consideration should be embed into

Answer 28

- at the highest level, asset allocation decisions - portfolio exposure to non-financial factors - risk management measures - performance attribution

Question 29

investment thesis includes: | role of analyst

Answer 29

- the intrinsic value of the security - credit analysis - the potential for a rerating or derating in valuation - potential risks - short-term and long-term catalysts - an expectation on the security's earnings growth and cash flow profile

Question 30

role of pms, primary role is to weigh security-specific conviction against:

Answer 30

- macro and micro-economic data - portfolio financial and non-financial exposure - sensitivities to potential shocks challenge: how to widen the focus of research and datasets largely optimized for security analysis into tolls that can be better inform portfolio and asset allocation analysis and decision-making, particularly in understanding where and how ESG contributes to risk-adjusted returns.

Question 31

ESG framework should illustrate a continuity from micro-to-macro forms of analysis, including:

Answer 31

- the organizing principles and methodologies for ESG analysis - the identification and analysis of financial and non-financial ESG materiality at the individual security level - the approaches to build a composite picture of risks and exposure at a single portfolio level - the representation of ESG risks and exposure that informs a mixed asset strategy which may include many different, underlying strategies

Question 32

ESG in light of 2 dif. inv. strategies Discretionary Quantitative

Answer 32

Discretionary ESG inv. - fundamental bottom up Quantitative - rules-based approaches employing the statistical application of financial or/nonfinancial factors to drive securities selections. quant seek to minimize higher cost associated with discretionary active mgmt discretionary strategies often focus on depth within a portfolio, manifested through a portfolio of a few, more concentrated holdings, quantitative strategies focus on breadth

Question 33

TCFD is principles-based framework providing recommendations for assessing climate risk and exposure

Answer 33

different approaches to measure carbon intensity have developed

Question 34

Weighted-avg carbon intensity at the portfolio level

Answer 34

sum (current value of inv/ current portfolio value * issuer's scope 1 and scope 2 GHG emissions / issuer's US$m revenue

Question 35

SASB's Materiality Map

Answer 35

is capable of assessing portfolio exposure to sustainability risks and opportunities across each issue

Question 36

SBSB work around the Sustainable Industry Classification System SICS modelled after the Global Industry Classification Standard (GICs)

Answer 36

offer an improved industry classification standard that speaks directly to ESG materiality. Organize companies according to their sustainability attributes, such as resource intensity, sustainability risks and innovation opportunities.

Question 37

platforms to upload portfolios 3rd ESG data provider | these platforms are capable of:

Answer 37

- illustrating a portfolio's mean exposure and weighting toward low-, mid- , or high-scoring companies on ESG metrics - producing a picture of the portfolio's environment and carbon exposure on an absolute-value basis - approximating an overall controversy or risk score for the portfolio

Question 38

negative screening - exclusions based on ethical preferences or around a normative worldview to shape the investable universe of a portfolio

Answer 38

often treated as irreconcilable exclusions across 4 basis categories: - universal - conduct-related - faith-based - idiosyncratic exclusions

Question 39

universal exclusions

Answer 39

represent exclusions supported by global norms and conventions like those from the UN and the WHO. arms and munitions, nuclear weapons, tobacco, and varying degrees of exposure to coal-based power generation or extraction all qualify as universally accepted given normative support and the growing AUM they represent

Question 40

Arms & munitions exclusions

Answer 40

- ottawa tready - anti personnel mine - UN Convention on Cluster Munitions - use, stockpiling, production and transfer of cluster munitions - UN Chemical Weapons Convention -use, stockpiling, production and transfer of chemical weapons - UN Biological Weapons Convention -use, stockpiling, production and transfer of biological weapons - treaty on the non-proliferation of nuclear weapon - limits the spread of nuclear weapons to the group of so-called Nuclear-Weapons States (USA, Russia, UK, France, China) - Dutch Act on Financial Supervision 'Besluit marktmisbruik'

Question 41

Tobacco exclusions

Answer 41

WHO Framework convention on Tobacco Control UN Global Compact UNGC exclude tobacco companies from participating the initiative UN SDG drive a collection of 17 global goals to eradicate poverty, protect the planet and improve prosperity

Question 42

conduct-related exclusions

Answer 42

company or country specific, and often not a statement against the nature of the business itself.

Question 43

Faith-based exclusions

Answer 43

specific to religious institutional or individual investors.

Question 44

Idiosyncratic exclusions

Answer 44

exclusions that are not supported by global consensus

Question 45

challenge- treatment of asset classes and securities that fall outside of the traditional spectrum of responsible investment that focus on:

Answer 45

listed equities listed corporate debt real assets

Question 46

Fixed income ESG rating

Answer 46

ESG1 ESG2 in investment grade credit, em debt and buy-and-maintain strategies government debt and high yield lower degrees of integration lower levels of ESG integration in areas like sovereign debt and high yield credit often reflect a scarcity in ESG rating and data sets and ratings, particularly in the unlisted credit markets.

Question 47

corp. debt

Answer 47

enjoys greater levels of ESG integration

Question 48

high ESG portfolio outperform low ESG portfolios despite being driven by diff. ESG methodologies

Answer 48

High ESG and quality have strong correlation | quality outperformed value

Question 49

The Fundamental ESG Risk Metric

Answer 49

examines fundamental ESG risk at the issuer level

Question 50

The Investment ESG score operates

Answer 50

at the bond security level. | ESG score takes into account varying credit risk sensitivities, which result from the exposure to ESG risk factors.

Question 51

Types of ESG investing bonds

Answer 51

green bonds/climate bonds social bonds 0 provide access to essential services, infrastructure and social programmes sustainability bonds allow issuers to offer more broadly defined bonds that still create a positive social or environmental impact sustainability-linked bonds provide financing to issuers who commit to specific improvements in sustainability outcomes transition bonds provide financing to 'brown' industries with high GHG emissiona (mining, utilities and heavy industry) SDG-linked bonds common overlap with green and social bonds enable issuers to raise capital by specifically committing and advancing to SDG-related targets. Blue bonds fund projects with clear marine and ocean-based benefits, such as sustainable fishing projects.

Question 52

The Climate Bond Portfolio realizes significantly higher exposure (30%) to companies that maintain Paris-aligned targets and are committed to setting Paris-aligned targets

Answer 52

the climate and ESG funds carry significantly higher weighting exposure

Question 53

Green securitization represents

Answer 53

the mutualization of illiquid, 'green' assets or a series of assets into a security. Green collateralized loan obligations CLO data can be easily quantified and screened exists

Question 54

The Green Finance Study Group GFSG defines 'sustainable asset' as:

Answer 54

sustainable loans, sustainable debt and sustainable bonds as specific financial products or debt linked to assets or investments that target environment and social sustainability, however, the more general consideration of financial sustainability is also contemplated.

Question 55

research points to a high correlation among CRA rating

Answer 55

as well as between CRA ratings and sovereign yields

Question 56

The World Bank dataset considers

Answer 56

- a country's governance score - its rankings on : political stability voice and accountability government effectiveness rule of law regulatory quality control of corruption

Question 57

significant correlation between country ESG risk and credit ratings

Answer 57

supporting the theory that ESG may be a leading indicator or at the very least a supporting factor for stable economies.

Question 58

a sector-neutral portfolio, the long exposure represents the top or best decile of ESG-rated companies

Answer 58

while the short exposure represents the bottom or worst decile

Question 59

long-short example provides empirical support for the logic that better-scoring ESG and carbon-efficient companies are capable of

Answer 59

1. enhancing ESG exposure but potentially outperforming their poorer-scoring peers as well

Question 60

ESG integration challenges in private equity

Answer 60

lack of public transparency, established reporting standards, regulatory oversight, and public market expectations around ESG lack of compulsory non-financial reporting regulations

Question 61

GRESB's full benchmark report provides a composite of:

Answer 61

- peer group information - overall portfolio KPI performance - aggregate environmental data in terms of usage and efficiency gains - a GRESB score that weights management, policy and disclosure Global Real Estate Sustainability Benchmark - risk and opportunities, monitoring and environmental - management system (ems) - environmental impact reduction targets, and - data validation and assurance

Question 62

Risk mitigation

Answer 62

the exercise of assessing and minimising the exposure of a portfolio to ESG risks.

Question 63

Financial Risk:

Answer 63

a variance volatility value-at-risk VAR

Question 64

Risk idiosyncratic risk systematics risk

Answer 64

idiosyncratic - firm-stock specific systematics - market risk such as economic recession, cannot be diversified away

Question 65

quantitative approaches to embed ESG factors

Answer 65

direct the portfolio in aggregate or on a top-down basis using algorithmic model ESG operates much like a factor within a multi-factor algorithmic inv. strategy

Question 66

ESG ratings coverage gap of a high yield credit portfolio where roughly 25% of the strategy's positions are unrated, coverage map may be due to a number of reasons: normalizing for a gap in excess of 25% should be reviewed for whether it over-or-under-represents a portfolio's true ESG exposure.

Answer 66

- the corporate bond issuer may be too small for ESG ratings providers to score - the bond may be a new issuer that has not yet been scored - it may be unlisted debt

Question 67

two approaches to address treating ESG coverage gaps within a portfolio

Answer 67

1. the simplest approach is to simply rescale the scoreable portion of the portfolio to 100% by proportionally resizing each scoreable position 2. the 2rd approach is to apply Bayesian inference to the coverage ratio, effectively grossing it up to 100% by probabilistic inference.

Question 68

EU taxonomy

Answer 68

a classification system organizing economic activities into environmentally sustainable activities.

Question 69

EU SFDR

Answer 69

Focuses on disclosure at the entity(manager) and the product(investment strategy) levels. also makes tremendous effort to normalize sustainability risk within all in-scope products.

Question 70

3 major groups in scope sustainability investment products from the EU SFDR

Answer 70

1. article 9 / dark green funds sustainable inv. as objective more impact oriented 2. article 8 / light green funds more broadly promote environmental and/or social characteristics 3. article 6 or other funds funds that do not actively promote sustainable inv. objectives or integrate sustainability criteria in ways that can be overtly marketed as such. manage risk

Question 71

policy objectives of EU legislative pieces are to:

Answer 71

- provide protections against greenwashing for investment products sold into the EU - further embed sustainability within risk management for all investment products - direct capital towards sustainable investment activities and away from unstainable investment activities to support the EU's commitment towards a 2050 climate neutral economy

Question 72

Exposure Draft of its ESG disclosure Standards

Answer 72

equips asset managers with requirements and recommendations to clearly disclose and communicate the ESG features of their investment strategies.

Question 73

RPI recognizes 3 main approaches to screening:

Answer 73

1. negative screening avoidance of the worst performance, such as sectors, regions, issuers, business activities/practices, product and services, and even security types such as certain commodities. 2. positive screening include best ESG performers relative to peers 3. Norms-based screening applies existing normative frameworks in order to screen issuers against internationally-recognized minimum standards of business practice. Screening generally applies globally recognized frameworks like treaties, protocols, declarations and conventions including: the UN Global Compact the UN Human Rights Declaration the ILO's Declaration on Fundamental Principles and Rights at work the Kyoto Protocol and the Organization for Economic Co-operation and Development OECD guidelines for multinational Enterprises

Question 74

PRI has outlined a sequences of 6 steps for when investors implement screening as an investment approach:

Answer 74

1. identify client priorities 2. Publicize clear screening criteria 3. Introduce oversight - oversees screening - conducts review - considers any changes in screening criteria 4. Adapt investment process 5. Review portfolio implications 6. Monitoring, reporting and audit

Question 75

Morningstar sustainability rating process

Answer 75

step 1 portfolio sustainability score asset-weighted avg. of Sustainalytics' company-level ESG Risk Rating: Portfolio sustainability= ESG risk * weights adj Step2: portfolio sustainability rating Portfolio are assigned absolute category ranks and % ranks within Morningstar Global Categories. The morningstar Sustainability Rating is its normally distributed ordinal score and descriptive rank relative to the portfolio's global category.

Question 76

one common criticism or ESG screening: reductive approach

Answer 76

quantitative measure does not consider softer forms of ESG, such as stewardship and engagement activities

Question 77

the sustainable investment label indicates in the fund has prospectus language that explicitly calls out its focus on:

Answer 77

sustainability impact specific environmental, social and/or government factors in its investment process

Question 78

correlation between ESG integration and greater diversification benefits, - largely focused on equities strategies

Answer 78

little to point at how to optimize portfolios for ESG and measure the risk-return compromise

Question 79

some correlation b/w incrementally higher ESG scores and lower CO2 emissions

Answer 79

but this is more pronounced over the 1st 100bps of tracking error correlation gradually diminishes as an ESG-optimized portfolio rebalances to underweight th tail of companies that are both lower ESG scoring and higher carbon-emissions intensive

Question 80

ESG integration focuses on measurability and comparability

Answer 80

PRI defines ESG integration as: | the systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions

Question 81

ESG

Answer 81

- INVESTMENT framework - as an embedded process - govern portfolio construction & mgmt - investment selection - risk mgmt evaluation

Question 82

Full ESG integration enlarges the scope of ESG analysis beyond the focus of risk mitigation

Answer 82

it recognizes that ESG analysis will produce a better understanding of both risk and opportunity of both losers and winners.

Question 83

FULL ESG integration depends on

Answer 83

deep-rooted, often propriety ESG research often lacks the easily-understandable optics tax greater effort to: - evidence internal and external research resources - document how ESG is embedded, typically in a process slide - track and report on engagement activities with company management - include portfolio exposure and weightings into sustainability themes like the SDGs - provide positive impact measurement of the portfolio against metrics like resources efficiency, water and energy consumption - support the process with investment case studies

Question 84

sin stock screen

Answer 84

exclude exposure in a portfolio to corporate issuers- stocks and bonds

Question 85

Under the DNSH principle in the Technical Expert Group Final Report on the EU Taxonomy

Answer 85

economic actives that make a substantial environmental contribution to the climate change mitigation or adaptation must not cause significant harm to the other designated environmental objectives, including: - sustainable use and protection of water and marine resources - transition to a circular economy, waste prevention and recycling - pollution prevention and control and - protection of health ecosystems

Question 86

the concentrated nature of thematic investing sacrifices the benefits of portfolio diversification

Answer 86

historically, clean energy thematic funds experienced greater volatility due to a number of factors, including: - exposure to changing regulatory incentives - a scarcity premium that reflected capital flows into and out of the sector - poor cash flow profiles

Question 87

clean energy tend to be pro-cyclical growth sector

Answer 87

underperforms when capital spending and economic cycle contract often used as hedges against inflation, underperform during expansions in economic cycles when investors rotates towards growth.

Question 88

impact investing

Answer 88

investments made with the intention of producing positive, measurable socio-environmental impacts without sacrificing financial returns.

Question 89

portfolio analysis and reporting against the SDGs:

Answer 89

full report compares: - full exposure relative to benchmark exposure - overall, sectoral and thematic contribution by the SDGs - performance metrics by underlying security - a more detailed breakdown of how the provider classifies SDG contributions

Question 90

A portfolio of listed securities should take efforts to clarify how the SDGs come into play regarding fund exposure in developed markets. Investors may choose to emphasise areas such as the portfolio’s exposure across various metrics that are aligned with the SDGs. This would include exposure to:

Answer 90

relevant product and services (revenue) exposure; ▶ regions, notably developing economies which the SDGs were originally designed for; ▶ sectors such as water utilities, renewable energy and healthcare; ▶ the relevance of supply chains; ▶ the additionality benefits of one or more of the SDGs, which may manifest in KPIs, such as job formation, renewable energy power generation and potable water production; and ▶ additional sustainable forms of agriculture and aquaculture.

Question 91

Active ownership may leverage direct engagement between investor and company management, collaborative engagement where investors collectively drive for change, filing shareholder proposals and resolutions as well as a proxy voting strategy that is driven by a clear agenda to:

Answer 91

encourage greater disclosure; ▶ improve transparency; and ▶ increase stronger awareness around ESG issues

Question 92

INTEGRATING ESG IN PASSIVE PORTFOLIOS The shift from active to passive investment strategies represents a substantial change in the allocation and composition of overall AUM. Indeed, passively managed assets have more than doubled as a percentage of total global AUM in the last decade.106 The shift is even more pronounced in the USA where assets in passively managed ETFs and mutual funds have increased from US$220bn (£158bn) to US$7tn (£5tn),107 representing roughly 43% of the value of the S&P500.106 Passive investment differentiates itself from actively managed strategies by the nature of its low costs and the simplicity of a determined, rules-based approach. Likewise, passive ESG approaches also seek to provide low cost alternatives to more expensive, actively managed investment funds. However, the relative nascent state of ESG and its data costs potentially mean that ESG passive strategies may run at a slightly higher fee structure relative to traditional passive strategies, although still significantly lower than actively managed ESG funds.108 Noteworthy examples of asset owners circumventing actively-managed ESG strategies and directly investing or independently creating passive ESG strategies include:

Answer 92

California State Teachers’ Retirement System (CalSTRS) Taiwan’s Bureau of Labour Funds (BLF)

Question 93

range and depth of ESG indices developed by FTSE Russell. It addresses several investor motivations through a mix of indices that prioritise:

Answer 93

▶ ESG on a holistic basis; 整体的 ▶ subsets of ESG themes, such as climate and environmental markets; ▶ ethical and normative exclusions; and ▶ single ESG themes, like diversity as measured by female board representation.

Question 94

challenge surrounding EGS

Answer 94

- DATA availability and credibility - diversification of portfolio - characterization of risk-return profile of ESG funds

Question 95

function of ESG indices

Answer 95

- investing to facilitate cash mgmt at the multi-asset level | - to measure sustainability of non-conventional ESG companies

Question 96

exclusionary screening approach

Answer 96

- reflects a fundamental value of asset owner's beneficiaries - to improve portfolio diversification benefits - simplest approach

Question 97

measure effective of ESG integration:

Answer 97

brinson attribution | risk factor attribution

Question 98

What ESG feature is often overlooked in screening approaches for collective investment funds:

Answer 98

position-weighted ESG portfolio score

Question 99

why have passive ESG indices been criticized as being more active than they are presented?

Answer 99

index inclusion may create crowing and overvaluation in specific securities

Question 100

least naturally-suited investment strategy to accommodate the SGDs?

Answer 100

negative screening