Lecture 1 Flashcards
Entities that can steer the conduct
- Governments (regulation and taxes)
- Charities (reward and subsidize)
- Financiers (ownership rights and funding)
Sustainable business
Economic activity geared towards improving the environment and society (corporate social responsibility)
Sustainable finance
- Providing the capital and cash to business that it needs to operate
- This includes investing and also insurance & banking
Sustainable investing
The process of incorporating environmental, social and governance (ESG) factors into investment decisions
Paper Schoenmaker & Schramade conclusions
No .. of managing for ..
No inclusion of managing for ESG in 2.0
ESG instruments
All affect the composition of the investment portfolio
- Negative/positive screening
- Integration
- Impact investing
No change in composition but “active shareholders”
- Engagement
- Voting as a shareholder
Misunderstanding Friedman
The business of business is business. Managers of companies are on earth to make a profit. However, shareholders can spend their own money and can make non-business decisions.
3 main types of goals that investors pursue in SI
- Purely financial goals subject to ESG constraints
- Mixed financial and impact goals
- Impact goals subject to financial constraints
Matching investors to SI typology
SI 1: screening (not intending to give up results)
SI 2: Integration (not intending to give up results)
SI 3: Impact investing (giving up returns is acceptable)
Why join a coalition?
- Peer effect: membership of key competitors
- Outside pressure: consumers and NGOs
- Reputation: to be seen as leader in sustainability
- Collective advocacy: coalition can push governments
- Collective engagement: increases success rate of ESG engagement
Sustainability
Concerns the effects on the environment and society of human behavior and of economic activity
Economic activity
Conduct of producers and consumers
Traditional investing
Goal to achieve the best possible risk-return trade off
Environmental
Pollution, waste & circular economy
Natural resource stewardship
Climate change
Social
Human and labor rights
Human capital management
Conduct, culture and ethics
Governance
Board effectiveness
Executive remuneration
Shareholder protection and rights
Social foundations examples
Food security Adequate income Access to health care Access to water and clean cooking facilities Education Decent work Modern energy services Equality Political voice
Paper Schoenmaker & Schramade conclusions
S&S do not consider ..
Governance
Paper Schoenmaker & Schramade conclusions
ESG integration according to S&S
Optimization over F, S and E (SI 2.1)
Paper Schoenmaker & Schramade conclusions
Hard to differentiate integration .. from ..
Integration 2.0 from simple F optimization
Paper Schoenmaker & Schramade conclusions
In investment industry ESG integration normally means ..
Both SI 2.0 and 2.1
Paper Schoenmaker & Schramade conclusions
The distinction of .. from .. is blurry. Think of .. as more ..
- SI 2.0 from traditional investing
- SI 2.0 as more long term oriented
Paper Schoenmaker & Schramade conclusions
Investors also have investment choices at their disposal that are not part of the S&S investment categorization:
(1) voting and (2) engagement, known as “voice”, it emphasizes why investors value G in ESG
Paper Schoenmaker & Schramade purpose
Identify the aim of investing:
- Target return without damaging the environment
- Target environment improve without losing money
- Something in between
Paper Schoenmaker & Schramade method
Making a useful categorization of the field of SI that can be translated in practice
Categorization of the field of SI
- Traditional Investing: Risk-return trade-off, only consider ESG if fitting within
- Sustainable Investing 1.0: Exclusion (of investments that do poorly by ESG)
- Sustainable Investing 2.0: ESG integration (2.0 account for ESG, optimise F and/or 2.1 optimise over F, S and E)
- Sustainable Investing 3.0: Impact Investing
Impact Investing
Have additional impact on society by making an investment
Scheme for paper analysis
Do investment choices that take ESG into account
affect ESG results and investment returns , either
directly or indirectly through the financial performance of firms and investment projects?
ESG Investment choices
Not only choosing from the SI 1.0-3.0 strategies, but also being an active holder of financial instruments
ESG Instruments
Do investment choices that take ESG into account
affect ESG results and investment returns , either
directly or indirectly through the financial performance of firms and investment projects?
Measures of results
- Financial performance measures: Profitability;
EBITDA; Turnover; Cost of goods sold - Investment return measures: Total returns; Return
to volatility measures - ESG results measures: Multiple based on
improvement of a firm’s ESG factors
Sustainalytics & MSCI
- Providers of opinions in form of ESG ratings
- Low correlation; especially for environmental and social aspects, and for smaller companies
Sustainable investing coalitions
Similarly to other coalitions, these are intended for reciprocal support in sustainable investment
- Develop methods and stimulate companies towards sustainability
- Coordinated engagement
Consciously owning a stock
- Engagement & voting/stewardship/active shareholder
- ESG integration
- Impact investing
