Lecture 2 Flashcards
What is responsible investing?
An approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns
3 main internal objectives for responsible investing
- Financial materiality (ESG as investment risk or opportunity)
- Doing no harm (preventing/reducing negative impact on the world of investments)
- Doing good (search for/increase positive impact on the world of investments)
Five dimensions of impact
- An impact is a change in outcome that would likely not happen anyway
- An outcome is an aspect of well-being of people or the planet
Five dimensions:
what, who, how much, contribution, risk
ESG Data
- Financial: Reporting data reflected in financial accounts and projections on them
- Single materiality: Reporting on the sub-set of sustainability topics that are material for enterprise value creation
- Double materiality: Report on matters that reflect the organizations impact on ESG factors
Implementing responsible investment
- Exclusion
- Active ownership. Stewardship
- ESG integration
- Impact and thematic investing
- Outcomes
Implementing responsible investment
- Direct and indirect exclusion
Direct exclusion: On products and services, industries or entire sectors, companies which violate widely recognized treaties etc
Indirect exclusion: Reactive engagement to bring change, typically on companies in ‘breach’ of widely recognized treaties, exclude in case of no meaningful progress within set timeframe on set objectives
Implementing responsible investment
- ESG integration
Systematically add material ESG factors in your investment process
Implementing responsible investment
- Impact and thematic investing
Select specific goal and invest in it (green bonds, green real estate, thematic equities)
Implementing responsible investment
- Stewardship: voting
Voting on ESG implementations
Implementing responsible investment
- Stewardship: engagement & objectives
Collaborate with other investors to propose ideas on meetings
Engagement objectives:
- Better beta
- Better alpha
- Doing no harm
- Doing good
Implementing responsible investment
- Stewardship: litigation
- Verify if the company respects ESG related manuals and laws
- Pursuing legal action on behalf of shareholders in order to seek indemnification often for ESG related misbehavior, achieve ESG improvements as part of the settlement
External objectives for responsible investing
- Commercial objectives
- Regulatory drivers
Phases of responsible investing
Part I-A Financial materiality
Part I-B Doing no harm
Part I-C Doing good
Types of screening (GSIA)
- Negative/exclusionary
- Positive/best in class
- Norms based
- ESG integration
- Sustainability themed
- Impact community
- Corporate engagement and shareholder action
Benefits of responsible investment
- Contributes to real world outcomes
- Improves staff retention and recruitment
- Protects brand
- Enhances financial results
Types of screening (GSIA)
Negative/exclusionary
The exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria
Types of screening (GSIA)
Positive/best in class
Investment in sectors, companies or projects selected for positive ESG performance
Types of screening (GSIA)
Norms based
Investments against minimum standards of business practice based on international norms, such as those issued by UNICEF
Types of screening (GSIA)
ESG integration
The systematic and explicit inclusion by investment managers of ESG factors into financial analysis
Types of screening (GSIA)
Sustainability themed
Investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture)
Types of screening (GSIA)
Impact community
Capital is specifically directed to traditionally underserved individuals or communities
Types of screening (GSIA)
Corporate engagement and shareholder action
Use of shareholder power to influence corporate behavior, through direct corporate engagement or by filing proposals based on ESG guidelines
Financial materiality
How sustainability creates value for companies
- Growth: New markets, Innovation
- Return on capital: Green sales, Sustainable value chain
- Risk management: Lower penalties, Better reputation
Financial materiality
How sustainability creates value for companies
Studies suggest
Outcomes
- Studies suggest: Lower cost of capital and better operational performance
- Outcomes: Better outcomes create opportunities, negative impact creates risks
Implementing responsible investment
- Outcomes
Quantify outcomes
