Intro to ESG Investing Flashcards
What is ESG Investing?
An approach to managing assets where investors aim to incorporate E, S, & G into their investment decisions bearing in mind long-term returns
Can also be thought of identifying, evaluating and pricing E, S, & G risks and opportunities
Examples of E, S, & G?
Environment - Social - Governance
Climate Change - Human Rights - Bribery
Waste - Modern Slavery - Executive Comp
Resource Depletion - Child Labor - Board Diversity
Pollution - Employee Relations - Taxes
Biodiversity - Working Conditions - Trade Associations/Lobbying
What is Triple Bottom Line Accounting?
Also known as the Three P’s - People, Profit and Planet: TBL suggests that long-term sustainable value creation is dependent on stable and well-managed social, environmental and economic systems.
What is CSR?
Corporate Social Responsibility: Company commitment to conduct business in an ethical way.
What is Responsible Investment?
Can be an “umbrella term” for all investment approaches that capture various aspects of ESG. At minimum its a practice that mitigates risky ESG practices in order to protect value.
In other words - how does ESG influence risk adjusted returns of an asset or the stability of an economy, etc.
Define SRI?
Socially Responsible Investing is an approach that applies social and environmental criteria, usually in conjunction with sector specific weightings.
A hurdle could be established for qualification within an investment universe
Can be used in conjunction with other strategies such as Best in Class, Thematic Funds, etc.
Best In Class Investing = Responsible Investing?
Not necessarily - Best in Class Involves selecting only companies that overcome a specific ranking hurdle established using sector or industry specific ESG criteria.
Compare Sustainable Investment to Thematic Investment?
Sustainable Investment refers to the selection of assets that contribute to a sustainable economy. Its a broad term that could also include a best-in-class approach or negative screening and/or ESG integration. Could refer to companies that positively impact or companies that will benefit from a positive impact.
Thematic investing is a subset of sustainable investing where investors select assets that fall under a certain sustainability theme such as smart-grid technology or EV’s. Not all these subsets are considered responsible investments.
What does Green Investment consist of?
Allocating capital to assets that mitigate climate change, biodiversity loss, resource inefficiency, or other environmental challenges.
Thus can be considered a sub-category of thematic investing and/or impact investing.
Note that Green bonds/loans are a big part of green investing.
What is the aim with Social Investment?
Allocate capital to assets that address the bottom of the pyramid (BOP -
BOP refers to the poorest 2/3rds of the economic human pyramid = over $4 Billion people)
Broadly speaking BOP investing is a market based model of economic development that seeks to alleviate poverty while providing profit to businesses that serve the underserved communities. Can include everything from micro-finance to accessibility of sanitation or clean energy.
Can also include social impact bonds.
What is achieved with Impact Investing?
Specific intent to generate positive and measurable social/environmental impact alongside financial return which differentiates it from philanthropy.
Typically it is achieved through direct investments in debt, equity, RE, or even public markets.
GIIN - Global Impact Investing Network estimates size of market to be $502 Billion with different investors expecting different levels of returns.
Differences between Ethical, Value Driven or Faith Based Investing?
They are the same! Referring to the same type of investment principles based on negative screening to avoid products and services deemed morally objectionable by the investor or a religion, or a convention or through any agreed upon principles. Examples include: Guns Tobacco Pornography Alcohol
Watershed Moments in ESG acceptance?
2005 - UN Environment Programme Finance Initiative commissioned the Freshfields report arguing that integrating ESG into investment analysis is permissible and arguably required.
2015 - Governor of BOE Mark Carney - chairman of Financial Stability Board said to regulators that “…once climate change becomes a a defining issue for financial stability, it may already be too late..”
2019 - PRI states that failing to consider long-term investment value drivers including ESG is a failure of fiduciary duty
2020- Larry Fink of Blackrock stated intention to step up consideration of climate change in investment considerations. Also the divestment from companies that generate more than 25% of revenue from coal production and mandated reporting from investee companies on plans on climate related plans and risks for operating under Paris Agreement ( limit global warming to less than 2 degrees C)
Name some ESG Investment Perspectives?
Fiduciary Perspective - Understand and incorporate material ESG factors into investment decision making in order to mitigate risk and safeguard assets.
Economic Perspective - Understanding that unless negative trends such as the increasing scarcity of natural resources (water, land) and the prevalence of health and income inequalities does not reverse, economies will be weakened and greater exposed to bubbles and spikes. This is particularly concerning for asset owners.
Impact and Ethics: Belief of some investors that investments can/should serve society along with providing financial returns.
Client Demand Perspective - Greater understanding that ESG factors influence company value, returns, reputation aka positive impact investing and negative screening
Regulatory Perspective - Across 50 of the largest economies, 48 have some form of policy designed to help investors consider sustainability risks, opportunities, and outcomes encouraging investors to consider long term value drivers.
What are the benefits of integrating ESG into corporate behavior?
1) reduced cost and increased efficiency: sustainability once perceived as requiring sacrifices, perception now is cost reductions/improved operational efficiency by better mgmt of resources, improved supply chain, minimized waste ( mckinsey estimates 60% increase in operating profits)
2) Reduced risk of fines and state intervention: Federal govt’s are enacting regulations to protect environment, improved sustainability will position companies to react to to changing regulations (mckinsey estimates 1/3rd of profits are at risk from state intervention)
- most at risk are automotive, banking and tech with their large govt subsidies
3) reduced negative externalities: (situations where the production/consumption of goods creates costs/benefits not reflected in the prices charged for them) Pollution creating a reduction in tourism or lowering life expectancy is an example.
- or when private costs are lower than societal cost, or market failures If INTERNALISED then cost to society needs to be reflected in price/cost
4) improved ability to benefit from sustainability megatrends: integrating a response to economic implications of social challenges( inequality, poverty, etc) and environmental issues
