Week 3

Question 1

What is the definition of sustainable finance?

Answer 1

Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.

Question 2

What are the six ESG motivations?

Answer 2

Values and Ethics
Risk Management
Fiduciary Duty
Financial Performance
Systemic and Economic Sustainability

Question 3

Describe the two different views concerning responsibilities of corporations.

Answer 3

Friedman with the Shareholder Theory; Corporations have no social responsibility to the society and should maximize their profit.

Freeman with the Stakeholder Theory; Corporations create negative externalities and therefore they have social and moral responsibilities for society.

Question 4

What does PRI stand for?

Answer 4

Principles for Responsible Investment

Question 5

What are the Principles for Responsible Investment?

Answer 5

6 ESG principles developed by the United Nations and the largest institutional investors in 2006. The principles were launched at New York Stock Exchange.

Question 6

Name 8 different rating agencies.

Answer 6

ISS ESG
Moody’s
MSCI
Fitch
S&P Global
Sustainalytics
Refinitiv
Reprisk

Question 7

Who regulates the banks in the world, Europe and VS?

Answer 7

World; Basel Committee for Banking Supervision
Europe; European Central Bank, European Banking Authority
VS: Federal Reserve Board, Federal Deposit Insurance Corporation

Question 8

Who regulates the insurers in the world, Europe and VS?

Answer 8

World; International Association of Insurance Supervisors
Europe; European Insurances and Occupational Pensions Authority
VS; Federal Insurance Office

Question 9

Who regulates the markets in the world, Europe and VS?

Answer 9

World; International Organization of Securities Commission
Europe; European Securities and Markets Authority
VS; Securities and Exchanges Commission

Question 10

Who regulates all financial sectors in the world, Europe and VS?

Answer 10

World; Financial Stability Board
Europe; European System of Financial Supervision
VS; Financial Stability Oversight Council

Question 11

What is greenwashing?

Answer 11

Pretending to be more ESG aware than you actually are

Question 12

According to research, do polluting firms perform better or worse?

Answer 12

Firms with more emissions earn higher returns because there is less demand from institutional investors for those companies. Thus, because the demand goes down, the expected return per share goes up.

Question 13

Name 6 different ESG areas used in the Netherlands.

Answer 13

Climate change mitigation.
Climate change adaptation.
Sustainable use and protection of water and marine resources.
Transition to a circular economy.
Pollution prevention and control.
Protection and restoration of biodiversity and ecosystem.

Question 14

Name the 7 ESG strategies.

Answer 14

1. Exclusion policy for negatively screened things
2. Norms-based screening
3. Selection of positively screened things
4. Sustainability-themed investing
5. ESG Scoring to be integrated into portfolio management
6. Engagement through shareholders
7. Impact investing

Question 15

What is the first ESG strategy; exclusion?

Answer 15

The exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria (worst-in-class)

Question 16

What is the second ESG strategy; norms-based screening?

Answer 16

Screening of investments against minimum standards of business practice based on international norms, such as those by UNICEF. (Criteria are for example weapons, tobacco, gambling etc.)

Question 17

What is the third ESG strategy; selection?

Answer 17

Investment in sectors, companies or projects selected for positive ESG performance relative to industry peers (best-in-class)

Question 18

What is the fourth ESG strategy; thematic?

Answer 18

Investment in themes or assets specifically related to sustainability (for example, clean energy, green technology)

Question 19

What is the fifth ESG strategy; integration?

Answer 19

The systematic and explicit inclusion by investment managers of environmental, social, and governance factors into financial analysis (stock picking score is a mix of fundamental score and ESG score)

Question 20

What is the sixth ESG strategy; corporate engagement?

Answer 20

The use of shareholder power to influence corporate behavior, including through direct corporate engagement, filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines

Question 21

What is the seventh ESG strategy; impact investing?

Answer 21

Targeted investments aimed at solving social or environmental problems, including community investing, where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose.

Question 22

What is the difference between impact investing and community investing?

Answer 22

Some community investing is impact investing but community investing is broader and considers other forms of investing and targeted lending activities.

Question 23

What are data sources for Corporate ESG data?

Answer 23

1. Corporate publications (self-reporting) (such as annual reports, corporate sustainability reports)
2. Financial and regulatory filings (standardized reporting)
3. News and other media
4. Non-Governmental Organization reports and websites
5. Company assessment and due diligence questionnaire (DDQ)
6. Internal models

Question 24

What is the divergence of corporate ESG ratings?

Answer 24

Research stated that the ratings of different rating agencies are highly varied which raises the question; which one should we trust?

Question 25

What are three potential reasons for the divergence in corporate ESG ratings?

Answer 25

Measurement - divergence refers to situation where rating agencies measure the same indicator using different ESG metrics
Scope - divergence refers to situation where ratings are based on different set of ESG indicators
Weight - divergence emerges when rating agencies take different views on the relative importance of ESG indicators

Question 26

Do funds time trades to look responsible while holding optimal portfolios most of the time?

Answer 26

ESG ratings incentivize institutional investors to hold ESG stocks. However, institutional investors window-dress their holdings to look greener than they are. As a result, funds may hold less ESG assets than we think.

Question 27

What is the GHG Protocol and how do they measure?

Answer 27

The Greenhouse Gas Protocol classifies a company’s greenhouse gas emissions in three scopes;
Scope 1: Direct GHG emissions
Scope 2: Consumption of purchased energy
Scope 3: Other indirect GHG emissions.
Scope 3 Upstream - emissions associated with supply side
Scope 3 Downstream - emissions associated with selling part