QFIP-133: ESG Criteria - Why Investors Should Care Flashcards
Describe a few reasons why it is important for firms and Investors to care about ESG
criteria
Firms may produce public bads, even when following regulation rules
Local protests and social media shaming can hurt these firms’ images and profits
Stocks are long lived assets where most cash flows occur in the distant future
These long horizon cash flows are difficult to forecast and will be impacted by
changes in regulations and socially acceptable business practices
Well governed, socially responsible firms are better adapted to changing regulatory
conditions and consumer tastes
Many consumers feel an ethical obligation to shift production toward lower
emissions
The possibility of stranded assets if a government takes over corporations that are
not operating efficiently
Cities may takeover local energy companies that generate too much pollution
In UK and Germany, policymakers are working on shutting down coal plants
Describe the case study of palm oil in Indonesia, and what it demonstrates about ESG
criteria
The case of palm oil in Indonesia illustrates the impact societal and government
pressure can have on firm behavior
The production of palm oil requires a significant amount of deforestation to create
farmland
However, deforestation is one of the largest drivers of carbon emissions
In response, many companies have pledged to stop buying palm oil from
producers who cause deforestation
Many international governments are working on persuading the Indonesian
government to adopt regulatory changes to limit deforestation
Explain why coal firm stocks performed poorly during the months after Donald Trump
won the 2016 presidental, despite Trump passing coal-friendly regulation
Despite coal-friendly regulation, the general trend in the nation has been to focus on
developing more environmentally friendly alternatives
Coal is now being out-competed by natural gas
Countries like China are shutting down coal plants, hurting the global demand for
coal
