Section 8 Flashcards
what does SRI investing refer to?
ethical or values based investing which screens out traditional ‘sin stocks’ (investments considered to be unethical).
what is ESG investing
examines the impacts of a wider set of characteristics and themes impacting the performance of companies
what are the two key SRI activities
screening
and shareholder advocacy and engagement
what is screening
includes or excludes company securities based on ethical criteria
what is shareholder advocacy and engagement
institutional investors seek to enact constructive change in investee companies by encouraging wider corporate responsibility or sustainable practices through engagement and thoughtful proxy voting
are screening and shareholder advocacy and engagement mutually exclusive
no - both are regularly used together
what does ESG generally take in terms of approach to ethics?
Agnostics approach
unless causes repetitional damage or is eroding its social license to operate
what is ESG concerned with
Sustainability rater than morals
what is the integration of ESG ideas into the traditional financial analysis complementary to?
complementary to the investment process in the longer term
what are the focuses of ESG investing
Environmental issues
social concerns
governance (management structure, shareholder rights, director independence and renumeration, board skills and executive compensation) - all proxies of understanding management and decision making quality
who publishes the stewardship code and what is this?
published by the financial reporting council it offers a set of principles for investment decisions which are considered to enhance long-term shareholder value
what is the Principles for Responsible investing
an independent organisation which aims to encourage responsible investment to enhance returns and better manage risks
what is the principles for responsible investing supported by but not part of?
the UN
what is the development of ESG factors as part of investment analysis supported by?
Growing empirical evidence that there is a positive relation between corporate financial performance and performance on ESG issues.
Why are ESG issues particularly important
The role of fiduciary duty and the ever wider recognition of the sustainability of investing in the long term
what has led to increased demand for ESG investing
- environmental issues have come increasingly to the attention of society as a whole
- societal concerns regarding diversity of employment and opportunities, human rights, animal welfare and consumer protection
- more data and information generally means that investors are much better educated and informed about these issues
- empirical studies have shown that responsible investing doesn’t lead to poor investment returns
- easy and widespread availability of investing vehicles to populate portfolios
- increasing evidence of better returns and mitigation to risk
what has lead to greater supply of ESG investing
- increasing demand
- increased disclosure requirements for companies regarding ESG factors has improved the transparency of investment choices
- widely accepted international standards for measuring ESG factors allow portfolios to be constructed in more objective ways
- repetitional risk - concern that a firm’s brand would suffer by association with poor ESG characteristics / unethical business behaviour
- financial risk - to mitigate financial risk and the impact on a company’s share price should there be an ESG factor blow up
- 6 principles for responsible investment offers high profile advocacy of the advantages of ESG investing
what are challenges of including ESG into investment analysis?
1) ESG factor information remains more resource intensive to acquire and assess than conventional audited financial information. It is still difficult to obtain consistent comparable, audited ESG information
2. Disclosure by companies of their ESG progress often trails reality, suggesting that resources needed to obtain an accurate picture of a company may be lacking
what is social impact investing
the provision of finance to organisations addressing social needs with the explicit expectation of a measurable social as well as financial return
what is the difference between esg and impact investing
ESG refers to considering ESG factors in investing decisions, along with more traditional influences on valuation, impact investing describes the intentional investment in a company specifically to have a positive impact on environmental or social issues
what are the key characteristics of impact investing?
- intentionality - by investor to generate social and/or environmental impact through investments
- return expectations - the generation of financial return on capital and, at worse, a return of capital
- impact measurement - the investor is committed to measure and report the social and environmental performance and progress of underlying investments. This helps ensure transparency and accountability and helps build awareness of impact investing performance
what can impact investing involve?
affordable housing, sustainable agriculture, healthcare, clean energy, improving education and creating job opportunities
