HC 10 Flashcards

1
Q

How ESG affects equity valuation, Risk, and performance?

A

I. Cash flow Channel
II. Idiosyncratic Risk Channel
III. Valuation Channel

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Cash flow channel:

A
  • A strong ESG profile is associated with a competitive advantage
    ➢ More efficient use of resources
    ➢ Better human capital management & development
    ➢ Long-term business plans and incentives
  • Higher profitability is linked to paying higher dividends (Cash Flow)

→ Nominator: Effect on expected cash flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Idiosyncratic Risk Channel

A
  • A strong ESG profile is associated with better risk
    management and compliance
    ➢ Better monitoring
    ➢ Less severe incidents, i.e., fraud, corruption,
    litigation
  • Lower firm-specific downside risk

–> Denominator: effect on discount rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Valuation channel:

A
  • A strong ESG profile is associated lower exposure systematic risks (resilience)
    ➢ Less vulnerable to systematic market shocks (beta)
    ➢ Lower cost of capital (e.g., Chava, 2014) – higher valuation
  • Investor preferences: Larger investor base and higher valuation

–> Denominator: effect on discount rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Sustainable Finance

A

“the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions, leading to more long-term investments in sustainable economic activities and projects. “ European Commission (EC)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Socially Responsible Investing (SRI)

A

“The practice of investing money in companies and funds that have positive social impacts.”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Negative screening (SRI strategies)

A

Exclusion from investment universe
An approach that excludes specific investments such as
companies, sectors or countries.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Positive screening (SRI strategies)

A

Best-in-class investment selection: Leading or best-performing investments are selected or weighted
based on ESG criteria
Norms-based screening: Screening of investments according to their compliance with international standards and norms.
Integration of ESG factors in financial analysis: The explicit inclusion by asset managers of ESG risks and
opportunities into financial analysis.
Impact investing: Investments made in funds with the intention to generate social and environmental impact alongside a financial return.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Engagement (SRI sstrategy)

A

Engagement and voting on sustainability matters: Engagement activities through voting of shares and engagement with companies on ESG matters.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Shareholder Activism:

A

Typically focused on issues related to the interestss of shareholders only

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Active Ownership:

A

Focuses on issues related to the interests of a broader range of stakeholders, including employees, customers, and creditors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

E. DIMSON, O. KARAKAŞ, and X. LI (2015) – Active ownership. Review of Financial Studies.

A

Bigger firms, firms with poor performance, higher reputational concerns and with potential collaborators are more likely to be engaged.

Engagements with firms with poorer performance and higher reputational concerns are more likely to
be successful.

Active ownership improves social welfare as it increases shareholder value when engagements are
successful and does not destroy firm value when engagements are not successful.

Active ownership attenuates managerial myopia and helps to minimize intertemporal losses of profits and negative externalities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Institutional investors practice strategy:

A

Passive index-based investment: hey pay little attention to risks and opportunities in individual companies. Consequently, limited resources monitoring or investment in new upcoming firms – less focus on ESG.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Concentrated ownership:

A
  • Theoretically, more concentrated ownership helps shareholders to overcome the costs of collective action and therefore promotes active shareholder behavior.
  • However: institutional investor differ considerably in their ability and economic incentives to exercise their shareholder rights.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

SFRD’s aim

A
  • Harmonized transparency to enable investors to be informed on the ESG impact and sustainability risks of financial products.
  • It is designed to limit possible greenwashing where products or services marketed as sustainable or climate-friendly do not in practice satisfy those standards.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Three classifications European funds

A

Article 6: Products without any sustainability objective
* Identify and disclose how sustainability risks are integrated into investment decisions

Article 8: Products that promote environmental or social characteristics
* Promotion of environmental or social characteristics, but primary goal need not be explicit sustainability

Article 9: Products that have a sustainable investment objective
* The primary investment objective is sustainability
* There is no significant harm done to other environmental- or social objectives
* Information about sustainability characteristics and their impact is transparently disclosed

17
Q

Assessment SFDR

A
  • On the one hand, 89% of respondents agree that the broad objective of the SFDR is still relevant today.
  • However, 83% of respondents totally or mostly agree that the SFDR is currently not being solely used as a disclosure framework as intended, but is also being used as a labelling and marketing tool (in particular Article 8 and 9)
  • Mixed views about effectiveness: 62% said the SFDR has not effectively strengthened protection for end investors or made it easier for them to compare financial products.
  • Concept ‘sustainable investment’ is not sufficiently clear.
  • Data availability and reliability