Financial Advice - Investments + ESG

Question 1

What is the difference in negative exclusions and positive selection

Answer 1

Negative exclusions:
* Directs fund manager to avoid particular sectors or behaviours
* For example a fund may exclude tobacco companies, weapons manufacturers, fossil fuel companies or companies with poor diversity, inclusion and equality practices

Postive selection
* Direct fund managers to invest in assets that meet specific published policy requirements
* Meet certain standards, best in sector or fit within a theme

Question 2

List seven key areas for investment which may be excluded by socially responsible investment managers

Answer 2

1. Tobacco/alcohol
2. Religous issues
3. War zones/weapons
4. Environmental issues/pollution/energy
5. Animal welfare
6. Social political policies
7. Expolitation of labour/ excessive remuneration

Question 3

Explain the ESG used to assess a company practices

Answer 3

ESG will help investors evaluate companies they wish to invest in
Environmental considers a company’s impact on climate change/pollution
Social factors such as human rights/ dealing with communities
Governance deals with a company management/ audits/ internal controls/ shareholder rights

Question 4

Explain the potential advantages and disadvantages of using ESG investments as part of a portfolio

Answer 4

Advantages:
Holdings can be aligned with personal values
Positive impact on society
Strong corporate governance
Lower legal and reputational risk/positive brand image
Greater transparency and accountability in dealings

Disadvantages:
Limited number of investment options
Lack of standardisation in assessing ESG status
Companies not required to disclose all information - sustainability -> comparison difficult
Higher cost
Potential for greenwashing

Question 5

Outline the benefits and drawbacks of being invested in tracker funds

Answer 5

Benefits
Low cost
Run by computer - no human error
Potential for growth
Perform in line with index
Can track any index
Geographical diversification
Liquid
Easy to understand
Active managers dont always outpeform

DRAWBACKS
Will underperform the market due to charges
Tracking error - will not match market exactly
Perform poorly in falling market
No active management - no alpha only beta
Currency risk
Lack of control over underlying assets