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Financial Analysis 101 > Session 6 > Flashcards

Session 6 Flashcards

1
Q

What is ESG

A

Environmental, social, governance
Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities

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2
Q

ESG - environmental

A 
Climate change 
Resource depletion 
Waste 
Pollution 
Deforestation
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3
Q

ESG - governance

A 
Bribery & corruption 
Executive pay 
Board diversity and structure 
Political lobbying and donations 
Tax strategy
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4
Q

Esg-social

A 
Human rights 
Modern slavery 
Child labour 
Working conditions 
Employee relations
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5
Q

History of responsible investing - 1971

A

Launch of PAX world fund

Started by 2 united methodist ministers to avoid investing money in companies contributing to the Vietnam war

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6
Q

History of responsible investing - 1977

A

Sullivan principles: equalities at work

Ex: non-segregation, equal pay, equal employment

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7
Q

History of responsible investing - 2000

A

Launch of global compact initiative

Built from Sullivan principles, aimed to implement universal sustainability principles based on CEO commitments

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8
Q

History of responsible investing - 2004

A

UN global compact report on how to better integrate ESG issues in asset management

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9
Q

History of responsible investing- 2005

A

First report to argue that ESG Integration is a part of fiduciary (trusting) duty

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10
Q

History of responsible investing:2006

A

Launch of the principles for responsible investment

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11
Q

The UNPRI 6 principles for responsible investment

A
  1. Will incorporate ESG issues into investment analysis and decision-making
  2. Be active owners&incorporate ESG issues into our ownership policies and practices
  3. Seek appropriate disclosure on ESG issues by the entities in which we invest
  4. Promote acceptance&implementation of the principles within the investment industry
  5. Work together to enhance our effectiveness in implementing the principles
  6. Each report on our activities&progress towards implementing the principles
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12
Q

Why invest responsibility?

A

Materiality
Market demand
Regulation

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13
Q

Why we invest responsibly? - materiality

A

Recognition in the financial industry and in academia that ESG factors can affect risks and return

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14
Q

Why we invest responsibly?

Market demand

A

Demand from beneficiaries and clients for greater transparency about how their money is invested

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15
Q

Why we invest responsibly?

Regulation

A

Guidance from regulators that considering ESG factors is part of investors duties to their clients and beneficiaries

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16
Q

ENRON

A

2001

  • Houston-based commodities, energy and service corporation
  • shareholders lost $74 billion, thousands of retirement accounts gone and jobs lost
  • by keeping huge debts off balance sheets
  • caught by internal whistle blower
17
Q

Impact investing

A
  • Made with the intention to generate positive, measurable social and environmental impact alongside a financial return
  • Target a range of returns from below market to market rate
  • Investors are committed to measuring and reporting the social and environmental impacts
18
Q

Impact driven vs return driven investing

A

Impact driven investors:
What’s the impacts of a company’s activities in the enviro and society?
Return-driven investors:
What’s the potential impacts of ESG issues on a company’s enterprise value

19
Q

Disclosures limitations and lack of standardisation

A
  • No standardised rules for ESG disclosures, nor is there a disclosure auditing process to verify reported data
  • Rating agencies must apply assumptions which adds to the subjective nature of ESG ratings
20
Q

Inconsistencies between rating agencies

A

Individual company ratings aren’t comparable across agencies, due to a lack of uniformity of rating scales, criteria and objectives

21
Q

Geographical bias

A
  • Regulatory reporting requirements vary widely by region and country
  • Companies domiciled in Europe often receive must be higher ESG rating than peers based in the US
22
Q

Company size bias

A

Companies with higher market capitalisation tend to be award ESG ratings they are meaningful better than lower market-cap peers

23
Q

Industry sector bias

A

Ratings agencies claim to normalise ratings by industry

However ESG often do not factor in company-specific risks

24
Q

Green washing

A

The process of conveying false impression/providing misleading info about how a company’s products are more environmentally sound
Like ‘whitewashing’ Meaning using misleading info to gloss over bad behaviour

25
Q

How to sport green washing

A 
Fluffy language 
No proof 
Out-right lying 
Irrelevant claims 
Excessive marketing

Financial Analysis 101 (10 decks)

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