Intro ESG Flashcards
ESG investing
an approach to manage assets where investors explicitly incorporate
environmental, social and governance factors
in their investment decisions with the long-term return of an investment portfolio in mind.
aim to correctly identify, evaluate and price, social, environmental and economic risks and opportunities.
Environmental
climate change resource depletion waste pollution deforestation
natural world
use and interaction with
renewable and non-renewable resources
Social
human rights modern slavery child labour working conditions employee relations
factors that affect the lives of humans
mgmt of human capital, non-human animals, local communities and clients
Government factors
Bribery and corruption executive pay board diversity and structure trade association, lobbying and donations tax strategy
Involve issues tied to countries/ or jurisdictions or are common practice in an industry
interest of broader stakeholder groups
Tripe bottom line TBL
generation of long-term sustainable returns is dependent on stable, well-functioning and well-governed social, environmental and economic systems.
Dynamic inter-relationship in ESG
ESG may impact risk, volatility and long-term return of securities
Investments can have both a positive and negative impact on society and environment.
Corporate sustainability
an approach aiming to create long-term stakeholder value through the implementation of a business strategy that focuses on the
ethical, social, environmental, cultural and economic dimensions of doing business.
corporate social responsibility CSR
company’s commitment to conduct business in an ethical way
led to theory of TBL
TPL: people, planet, profit
TBL accounting theory 3Ps
people
planet
profit
effective sustainability can
reaffirm the company’s license to operate in the eye of gov’t and civil society
increase efficiency
attend to increasing regulatory requirements
reduce the prob. of fines
improve employee satisfaction and productivity
drive innovation and introduce new product lines
Responsible investment
All but engagement related to portfolio construction.
combine financial and non-financial outcomes
complements traditional financial analysis and portfolio construction techniques
Engagement by equity and bond holders
concern whether and how an investor tries to encourage and influence and an issuer’s behavior on ESG matters.
Social investing
Social impact investing
with a focus on social and/or environmental outcome and some expected financial returns
Return: social return and sub-market financial return
Impact investment
Social impact investing
with an intent to have a measurable environmental and/or social return
return: social return and adequate financial market rate
ESG investing
Sustainable and responsible investing
enhance lt value by using ESG factors to mitigate risks and identify growth opportunities
return: financial market return focused on long-term value
Social responsible investment (SRI)
approaches that apply social and environmental criteria in evaluating companies
best-in-class investment
not all are considered to be responsible investment
all-sector approach - try to maintain certain characteristics of an index.
select only the companies that Overcome a Defined Ranking hurdle, established using ESG criteria within each sector or industry.
Sustainable investment
may include best-in-class and/or ESG integration
companies with positive impact or companies that will benefit from sustainable macro-trends
selection of assets that contribute in some way to a sustainable economy.
thematic investment
not all are responsible investments or best-in-class
select companies that fall under a sustainability-related theme, such as clean-tech, sustainable agriculture, health care or climate change mitigation.
Green Investment - a broad sub-category of thematic/impact investing
green bond - raise money for climate and environmental project
allocating capital to assets that mitigate: climate change biodiversity loss resource inefficiency other environmental challenges
Social investment
address the bottom of the pyramid (BOP)
allocating capital to assets that address social challenges
BOP bottom of the pyramid
market-based model of economic development that seeks to simultaneously alleviate poverty while providing growth and profits for businesses serving these communities.
the poorest 2/3 of the economic human pyramid
>4 billion people living in poverty
micro-finance/insurance
access to basic telecommunication
access to improved nutrition and healthcare
access to (clean) energy
Impact investment
measurement and tracking of the agreed-upon impact
have diverse financial return expectations
Global impact investing network (GIIN)
investments made with specific intent of generating positive, measurable social and/or environmental impact alongside a financial return.
associated with direct investment
- private debt
- private equity
- real estate
Ethical (value driven ) and faith-based investment
avoid the negative
invest in line with certain principles, often using negative screening to avoid investing in companies whose products and services are deemed morally objectionable by the investor or certain religions
exclusions: tobacco, alcohol, weapons
shareholder engagement depends on
scale of ownership
quality of engagement dialogue and method and
whether the company has been informed by the investor that
撤资
divestment is a possible sanction
most active challenges within ESG
identify issues which are genuinely material to a sector and company
modern fiduciary duties require investors to
incorporate financially material ESG factors into inv. decision-making, consistent with the time frame of the obligation
understand and incorporate into decision making the sustainability preferences of beneficiaries or clients, regardless of whether these preferences are financially material.
Be active owners, encouraging high std of ESG performance in the companies or other entities in which they are invested
support the stability and resilience 弹力of the financial system
disclose their investment approach in a clear and understandable manner, including how preferences are incorporated into the schemes inv. approach.
Economic perspectives
FSB identified climate change as a potential systemic risk
Stockholm resilience centre
9 planetary boundaries
climate change
loss of biosphere integrity
land- system change
altered biogeochemical
cross
core boundaries
climate change and biosphere integrity
social issues
income inequality
economic cost of social stresses/undernutrition
UN Sustainable Development Goals (SDGs)
ALIGNING WITH GLOBAL PRIORITIES
Client demand perspective
increase transparency about how/where money is invested
driven by: growing awareness that ESG factors influence: company value returns and reputation
regulatory perspective
hard law -
actual binding legal instruments and laws
Soft law -
quasi- legal instruments which do not have legally binding force/may overtime become hard law
Financial materiality of integrating ESG
add risk consideration
injects new/forward-looking insights into the investment process
lead to:
- reduced cost and increased efficiency
- reduced risk of fines and state intervention
- reduced negative externalities and
- improved ability to benefit from sustainability mega trends
1 efficiency and productivity
conserving resources
reducing costs and
enhancing productivity
cost reduction from improving operational efficiency through better mgmt of natural resources like water and energy.
avg IRR b/w 27-80% on their low-carbon investments
2 reduced risk of fines and state intervention
at risk from state intervention
- reduced negative externalities
main reason gov’t intervene in economic sphere
production or consumption of goods and services creates costs or benefits to others that are not reflected in the prices charged for them
caused by social factors
when it’s negative, private costs are lower than societal costs, resulting in market outcomes which may not be efficient - leading to market failures
Internalisation成为主观，内在化
refers to al measures (public/private) to ensure that externalities 外部become reflected in the prices of commercial goods/services.
environmental and social regulation and taxation rise, it’s expected that an increasing proportion of this cost might be forced into companies accounts.
can happen through:
market-based instruments (tax)
regulatory instruments (vehicle emission and safety standard)
voluntary instruments (engagements with the car industry to rescue CO2)
- improved ability to benefit from sustainability mega trends
recognize economic implications of:
social challenges
environmental issues
they interacted with
- aftermath of 07-08 financial crisis
- aging population
- rising or em economies
- rapid technological changes
Challenges in integrating ESG
- implementing ESG may have a negative impact on investment performance
- interpretation that fiduciary duty prevents investors from investing ESG
- the advice given by inv. consultants and retail financial adviser, has may times not been supportive of products which integrate ESG
- lack of understanding
- impression that significant resources, which may be lacking in the market or may be expensive, are needed.
- gap between marketing, commitment and delivery of funds regarding their ESG performance.
greenwashing
misleading claims about environmental practices, performance or product, but has been used more widely to incorporate ESG factors more broadly.
meta- analysis
research process used to merge the findings of single, independent studies to reach an overall conclusion.
positive correlation between ESG performance and corporate financial performance, including stock prices., providing academic evidence for the financial materiality of ESG factors
good esg std lower the cost of capital
good esg practices result in better operational performance
show that stock price performance is positively correlated with good sustainability practices
-fund
but has not been consistently able to translate ESG analysis into alpha.
- alpha from ESG might be captured elsewhere in factors studies
- impact of different ESG approaches in different studies might cancel each other out
- cost of implementation consume the available alpha
Institutional inestors reflect ESG considerations in 3 ways:
- incorporate ESG factors into investment decision-making
- through corporate engagement
- through policy engagement
incorporate in investment decision
asset owners:
- include ESG factor for proposal
- investment consultants can factor in policy and selection process
- can reassure that their views on ESG are implemented by integrating them into investment mandates and monitoring processes
asset owner/managers can embed ESG in SAA strategic asset allocation.
SAA - process in which an investor chooses to allocate capital across asset classes, sectors and regions based on their need for return and income, and risk appetite.
asset manager/owner invest directly can incorporate ESG issue within security selection:
- using rating to apply a filter or threshold
- integrating ESG issue within their financial and risk analysis
- using ESG criteria to identify investment opportunities through a thematic approach
putting ESG into practice
investment decision
shareholder engagement
policy engagement
United National initiates UN
3 initiatives:
- United Nation Global Compact UNGC
adhere to 10 principles
from Universal Declaration of Human Rights
International labour organization’s declaration of fundamental principles and rights at work
cover human rights, labour, environment and anti-corruption
United Nations Environment Program Finance Initiative
UNEP FI
partnership between uNEP and global financial sector tomobilise private sector financial for sustainable development.
- PRI principles for responsible investment
understand the implication of ESG to investment and ownership decisions and ownership - PSI principles for sustainable insurance
- PRB principles for responsible banking
- PRI principles for responsible investment
support in 4 main areas:
- provides tools and reports on best practices for asset owners/managers, consultants and data suppliers, supporting the implementation of the principles across all asset classes and providing insights into ESG issues.
- host a collaborative engagement platform, by which it leads engagements and also enables like-minded institutions to coordinate and take forward engagement with individual companies and sectors
- review, analyses and responds to responsible investment-related policies and consultants
provide a policy map to investors and facilitates communication between investors and their regulators on the topic of responsible investment - develops, aggregates and disseminates academic studies on responsible investment-related themes
6 principes
- incorporate ESG issues into inv. analysis and decision-making processes
- will be active owners and incorporate ESG issue into our ownership policies and practices
- will seek appropriate disclosure on ESG issues by the entities in which we invest
- will promote acceptance and implementation of the principles within the investment industry
- will work together to enhance our effectiveness in implementing the principles
- will each report on our activities and process towards implementing the principles
3 requirements:
- investment policy that covers the firm’s responsible investment approach, covering >50% of assets under management
- internal or external staff is responsible for implementing responsible inv. policy.
- senior - level commitment and accountability mechanisms for responsible investment implementation
United National framework convention on climate change (UNFCCC)
aims to stabilise GHG emissions to limit man-made climate change
hosts two conferences of the parties (COP) meetings:
- COP3 kyoto 1997, created the kyoto protocol
industrialized countries to limit and reduce their GHG emissions in accordance with agreed individual targets - COP21 paris 2015, led to paris agreement
commits developed and emerging economics to strengthen the response to the threat of climate change by keeping a global temperature rise this century well below 2C above pre-industrial levels.
UN Sustainable development goals SDGs
replacement of uN Millennial goals
blueprint to address the key global challenges, including those related to poverty, inequality, climate change, environmental degradation, peace and justice.
17 goals are all interconnected aimed at governments. 1. no proverty 2. zero hunger 3. good health and well-being 4. quality education 5. gender equality 6. clean water and sanitation 7. affordable and clean energy 8. decent work and economic growth 9. industry, innovation and infruastrucure 10. reduced inequlities 11. sustainable cities and communities 12. responsible consumption an production 13. climate action 14. life below water 15. life on land 16. peace, justice and strong institutions 17 partnerships for the goals
Global reporting initiative (GRI)
publishes the GRI standards, provide guidance on disclosure across environment, social and economic factors for all stake holders, including investors, whereas the other major frameworks are primarily investor focused.
Value reporting foundation (VRF)
formed upon the merger of the international integrated reporting council (IIRC) and the sustainability accounting standard Board (SASB)
provide investors and cooperates with a comprehensive corporate reporting framework across the full range of enterprise value drivers and standards.
IRF encouraged companies to integrate sustainability within their strategy and risk assessment by integrating it into the traditional annual report
SASB focused on key material sustainability issues, determining what is material for reporting, and aids more standardized benchmarking.
CDP former carbon disclosure project
NGO that support disclose and manage environment impact
CDSB climate disclosure std board
international consortium 财团of business and environmental NGOs
to create the enabling conditions for material climate change and natural capital information to be integrated into mainstream reporting
CRD corporate reporting dialogue
joint project led by the CDP, the CDSB, the GRI, the IIRC and the SASB.
To drive better alignment of sustainability reporting frameworks with frameworks that promote further integration of non-financial and financial information
better alignment project is focused on driving better alignment in the corporate reporting landscape,.
international business council ESG disclosure framework
EDF
aims to bring greater consistency and comparability to sustainability reporting by establishing common metrics for company disclosure.
disclosure on a comply or explain basis
AIGCC
asian investor group on climate change
initiative to create awareness among asia’s asset owners and financial institutions about the risks and opportunities associated with climate change and low carbon investing
Global impact investing network (GIIN)
focuses on reducing barriers to impact investment by building critical infrastructure and developing activities, education and research that help accelerate the development of a coherent impact investing industry.
- facilities knowledge exchange
- highlights innovative investment approaches
- builds the evidence base for impact investing
- produce tools and resources
Global sustainable investment alliance GSIA
international collaboration of membership-based sustainable investment organizations. Forum for advancing ESG investing across all regions and asset classes.
ICGN
International corporate governance network
investor-led organization established in 1995 to promote effective standards of
corporate governance and investor stewardship
to advance efficient markets
Task force on climate-related financial disclosures TCFD
takes the Paris agreement’s target of staying well under 2 C, with the ambition of staying under 1.5c and tries to operationalize it for the business world
- governance: to organization’s governance around climate-related risks and opportunities
- strategy: the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning
- risk mgmt: the processes used by the organization to identify, assess and manage climate-related risks
- metrics and targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities
EU’s sustainable finance disclosure regulations SFDR
to support institutional asset owners and retail clients to compare, select and monitor the sustainability characteristics of investment funds’ by standardizing sustainability disclosures.
about integration of sustainability risks
consideration of adverse sustainability impacts
promotion of environmental or social factors
sustainable investment objectives
applies to all financial advisors sand financial market participants
introduce new concept into EU’s regulatory environment
Principal Adverse Impact (PAIs) - negative effects from jan investment on sustainability factors
18 indicators
46 voluntary disclosure indicators
defines 2 categories of sustainable financial products:
article 8 products that promotes sustainability characteristics
article 9 products that have stringent, primary objectives for positive sustainability outcomes
universal owners - large institutional investors
highly diversified across all sectors, asset classes, and regions
inv. returns are thus dependent on the overall economy.
reason for implementing ESG stems from the recognition that negative mega trends will overtime, create drag on economic prosperity and may increase instability both with countries and between the global north and south.
what’s the most probable reason why an investor would engage with policy markers on ESG?
The consideration of ESG-related matters can contribute to the proper functioning of the financial markets.
