Long Term Value Creation Flashcards
market framework used in traditional investing
efficient markets hypothesis
market framework used in long term value creation
adaptive market hypothesis
what is the value indicator in traditional investing
earnings per share
what is the value indicator is long term value creation
sophisticated DCF with scenarios for internalisation
most of the benefits form diversification exists between how many stocks
0-40
what are the investment chains like in traditional investing
long and complicated
what are the investment chains like in long term value creation
short and simple
what are the limitations for inclusion of ESG factors onto prices
they are add-ons and do not address the core issue
there are design limitations as they are based only on disclosed information, and their is no verification for what is being claimed
what is included in active investing approach
Allocating assets from fundamental ESG analysis
more concentrated portfolio
engagement with companies
alternative measures of performance
what is the adaptive market hypotesis
says that a degree of market efficiency depends on market ecology
and the pricing of ESG information will depend on the number and quality of market participants. So the more companies and investors taking these environmental issues seriously, the more the market will adapt to include these in the pricing
if there is low uptake from individuals to change, is this an efficient market
no
what can be explained by adaptive market hypothesis
why new risks eg carbon tax increases are not fully priced
which companies do tend to be correctly priced
large companies
because they are in the media a lot and have a lot of equity analysts covering them
which is more plausible
Efficient market hypothesis
Adaptive market hypothesis
Adaptive
does effiency in a market go through cycles
yes
what does it mean to move from ESG factors to fundamental esg analysis
some things just cannot be numbered eg social factors
rating agencies aren’t always aligned with eachother
just more standardisation needs to be done so you cannot just compare based on ESG rankings alone
what are some examples of changes in accounting auditing
now trying to value intangibles like brands, R&D stc
what are the negatives of over diversification
serious engagement with individual investments not feasible. Might be shallow such as voting but not dialogue
there is a point where extra diversification no longer creates benefits, most benefits are in the early stages
what is the ideal level of engagement for active investing
being integrated in the process from analysis to selection
pressuring the board to end unsustainable practices, improve their reporting etc
what should firms use as alternative measures of performance
KPIs that are not just linked to earnings
should also have environmental and social targets
why would a step up coupon be a good idea incentive for SDG bonds
to make firms stick to what they said and use that money on enviromental/social purposed
what are the steps in the value driver adjustment approach
- Identify and focus on the most material issues
- What is the impact of these issues on the company?
- Quantify advantages and disadvantages - what positive and negative externalities are not being charged for
- Active dialogue
what is corporate governance
deals with conflicts of interests between owners/shareholders and managers of a firm
what is the difference between europe and US when it comes to sustainable investing
Europe says pension funds are obliged to take ESG factors into account
In the US if it is found out that taking ESG factors into account hurt the financial performance of the pension fund, you could be sued
some alternatives to privately listed companies
private equity
cooperation
b corporation
social enterprise
governmental organisation
what is a B corp
certified company meeting social and environmental standards (but no legal status)
what is the tragedy of the horizons problem
most of the costs are now and the benefits in the future so there is little incentive for this generation to act
mechanisms to reduce short termism
avoid single focus on financial results
report on development goals F + S + E
what does SRI stand for
socially repsponsible investment
what does EFT stand for
electronic traded funds
what is good about EFTs
low transaction costs
low management fees
still provides good return for investors
why is quantitative analysis not enough when analysing for investments
relies heavily on past information and this might not be relevant for the more green and circular way of the future
What are the 5 forces that can cause externalities created by companies to become internalised
- Government (could be blacklisted by a government in a certain country, governments create taxes eg carbon tax)
- Financials
- Corporates (want a balance between profitability and sustainability, eg Penny’s cannot change its business model overnight)
- NGOs (increase awareness and drive changes)
- Customers (tastes can change)
