Impact Investing Midterm

MSCI ESG Ratings

-200+ analysts evaluate data from voluntary company disclosures and captured by other methods -Ratings are the basis for 1,000+ indices -Public securities only -Selects key issues to a company according to industry its in and its business model - Ranked from AAA to CCC Leader: AAA & AA Average: A - BB Laggard: B - CCC

Fiduciary Duty

-A fiduciary duty is a legal duty to act solely in another party's interests. -"Examples of fiduciary relationships include those between a lawyer and her client, a guardian and her ward, and a director and her shareholders." -General duty of care / loyalty to client -Most investment managers with investment discretion are fiduciaries - Due to Advisers Act of 1940 -Managers of retirement investment plans are fiduciaries under ERISA -Even charities managing their own funds have a fiduciary responsibility

Norms-Based Screening

-A type of exclusionary investing -Practice of filtering out certain investments based on whether they conform to global standards and norms established by multinational governing bodies

Brinson, Hood and Beebower ( FAJ, 1986), "The Determinants of Portfolio Performance"

-Analyzed investment policy, market timing and security selection of sample pension plans -Found that investment policy drives the largest proportion of risk (93.6% on average) -Timing selection on average actually destroyed value -So asset class selection (beta selection) drives performance

Amount of Funds in SRI Portfolios

-As of Jan 1. 2018, $12 Trillion was professionally managed in SRI portfolios in the US (26% of all professionally managed assets in the US are in SRI portfolios) -$3 trillion of SRI/ESG AUM is managed for the benefit of individual investors (14% of the $22 trillion managed by U.S. registered companies) -Has been growing rapidly/exponentially (300% growth since 2005) -91% of institutional ESG assets are managed by public funds (such as SRI mutual funds) and insurance companies

Integration of GIIRS & B Lab

-B Lab Impact Assessment is the data source for GIIRS ratings -Over ~100,000 -The Impact Assessment tool is a simple-to-use form which prompts users to enter data relevant to their type of company. Using the tool is free, as is comparing scores with industry averages, though becoming a certified B Corporation is not free -Quick assessment meant to stimulate interest, which is very easy and fast to use

Impact Measurement: Climate Change Mitigation

-Global standard for COP target compliance is reduction in metric tons -Each ton reduced has a market price: currently about $25.60 (higher price is good for environment). Tons of volatility -Makes assumption that controlling for CO2 emissions alone will have the desired effect -Assumes a ton anywhere is equal to another socially (though it might not be financially equal, as different markets set varying carbon prices)

Post 2009- Regulation (especially Dodd-Frank)

-Greatly enhanced shareholder power -Shareholders now mandated to vote on pay of top executives

Proposed Reforms

-Raise the ownership threshold to $2,000 worth of stock for three years, $15K for two years, or $25K for one year -Require that the proposer meet with the company if the company wishes -Make the resubmission thresholds tougher, so resolutions would have to secure a greater percentage of shareholder support to be put on the ballot again the next year.

Fink and BlackRock

-BlackRock clients worldwide have expressed strong interest in reallocating assets to sustainable investments -Fink warned companies that: "Given the groundwork we have already laid engaging on disclosure and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them." -Will employ SRI in portfolio construction -More ESG ETFs -BlackRock will divest from publicly traded companies that derive more than 25% of their revenues from thermal coal production by the middle of the year -BlackRock also will expand its range of sustainable actively managed strategies, including those focused on the global energy transition and impact investing funds.

Giant Asset Managers

-BlackRock is the world's largest (non-governmental) asset manager with $1.7 trillion in actively managed funds ($7+ trillion in total AUM, including passive indices) -Announced intensification of BlackRock activism with companies -Shift of emphasis from proxy voting to engagement (i.e. demanding meetings)

Katherine Klein

-Board gender diversity is a good thing, but weak tea Impact investing is not SRI or ESG investing, or shareholder activism. All began before Believes in intentionality. Impact investing is investing in companies, organizations, and projects with the intention to generate financial returns and positive social or environmental impact Increase in gender diversity (20% of seats occupied by women). Only 11% have no women Boards don't really have much influence California requires that each pubic company that is based in CA has at least one woman on its board Goldman only will IPO a company where there's at least one diverse board candidate McKinsey study that shows diverse boards do better was a poorly run study. Actual evidence shows no impact on diversity and financial performance Women may not necessarily bring cognitive diversity

Multifactor Models

-CAPM does not allow for multiple sources of systematic variation and asset and portfolio returns -Expected returns don't appear to increase in proportion with beta -Multifactor models use different factors to determine optimal mean-variance efficient portfolios -Ex) value vs growth, small vs large, high vs low momentum, investment styles, etc

Labor Unions / Union Pension Funds

-Can engage directly or through umbrella groups -AFL-CIO helps with coordination Objectives: 1. Higher pay, improved working conditions at company or its suppliers 2. Reform governance: cap CEO pay, separate CEO & board chair role 3. Spur company to adopt CSR agenda 4. Value Related Risk: CalPERS concept, material factors which can impair performance (environment, board diversity, etc) 5. Exogenous political/social causes such as Sudan divestment 6. Transparency of political contributions Motivation: Expand membership, increase political and bargaining power, gain economic benefits for rank and file

GIIRS Ratings

-Comparable to MSCI IVA, but administered by B Analytics, affiliate of the non-profit B Lab, which certifies companies that have a social mission, upon application -IRIS is the reporting language used to standardize inputs -Covers private as well as public companies -Most B Lab's B Corporation certifications have gone to private companies -Similar to Morningstar fund ratings, with a star system, but also a point system with weighting among different social topics -Though seemingly both precise and complex, is really a subjective values assessment

Returns Dispersion: The Envestnet Study

-Compared the performance of SRI and non-SRI funds at the outer ends of the dispersion of returns -Particularly how SRI vs non-SRI do during bull markets, bear markets, and economic shocks -Difference in performance between SRI and non-SRI funds when comparisons are made at the quintiles away from the median

Geczy, Stambaugh and Levin

-Construct optimal portfolios of mutual funds for mean-variance investor -Calculate certainty equivalent differences between optimal SRI and total fund portfolio -Calibrate by skill (alpha) and model mispricing -On aggregate basis, the SRI constraint does not tightly bind for a typical optimal equity mutual fund investor seeking the highest ex ante reward-to-risk tradeoff -SRI constraint has costs when one believes that style matters, fund managers have skill, or pricing models in the industry have flaws

"Pricing Impact" David Wilton, Zheng Partners LLC

-Entirely possible to retain the Friedman Doctrine as the operational paradigm and still reach the conclusion that corporations need to take impact into account in order to maximize shareholder value -Friedman wrote about how managers need to maximize shareholder value, but acknowledged that shareholders need not always only value financial returns (e.g. hospital or school) -Author claims that clients want impact incorporated into the management of their portfolios -Author contends that when the inclusion of impact into investor mandates will send pricing signals that even those not interested in ESG cannot ignore -Impact will be a decision variable as popular as risk and return -Financial intermediaries (e.g. Goldman, TPG, KKR) recognize client demand in the space -Then, shift in client demand shifts the pricing of capital. The cost of capital to more impactful assets will decline -Due to this, management will be acting in best interest of shareholders by pursuing impact, as they are lowering their cost of capital (and pushing up prices). Not considering impact will diminish shareholder value -Additionality is directly linked to the idea of attribution. Question of why you care about attribution/who gets the credit when it comes to achieving outcomes? Author contends additionality is not necessary -Some funds are required to do additionality, because it provides a way for monitoring the works they do (micro impact). In macro, it doesn't really matter who does it.

European Pension Plans

-European governments have moved decisively to integrate SRI into investment policy

SRI Mutual Funds

-Explosion in the number of offerings; overwhelming percentage of funds are in mutual funds. ETFs not that big

The Challenge of Measuring Social Impacts

-For certain investors, a successful investment can have a financial return lower than other investments with comparable risks, if its social impact compensates the investor for the foregone financial return component -Difficult to quantify the amount of social impact needed to offset a lower risk-adjusted return -There are countless dimensions of impact -Difficult to standardize impact, although some larger players are trying to use their standing to do so

Gadflies

-Freelance shareholder activist -Evelyn Davis was most famous (motivated by selling newsletters) -Nominally stand up for the little guy/voiceless

IRIS

-Impact Reporting & Investment Standards is a common data reporting platform for social-oriented enterprises -Trying to standardize a common reporting language for impact-related terms and metrics. By standardizing the way organizations communicate and report their social and environmental performance, IRIS aims to increase the value of non-financial information by enabling performance comparisons and benchmarking, while also streamlining and simplifying reporting requirements for companies and their investors -Data reported under IRIS are financial metrics, not social impacts (e.g. gross & net profit margins, wages/employee, and percentage of revenue to "smallholders - i.e. poor entrepreneurs and farmers) -Reporting is voluntary for members -Sponsored by Global Impact Investing Network (GIIN)(associated with Rockefeller Foundation) giving it credibility -Reporting entities are primarily microfinance organizations, 70% are profitable

Best-In-Class Investing

-Inclusionary approach -The best-in-class investing approach can include investment in companies that have the highest rated ESG performance for their industry or sector—even if that industry rates lower than others on overall sustainability. Choosing the best-in-class oil and gas companies, for example, allows investors to build a well-rounded portfolio and still pursue sustainable investing.

ISO 26000

-International Organization for Standardization -NGO based in Geneva -ISO 26000 deals with CSR -Voluntary and cannot be certified to as with other ISO standards -Companies opt-in what they want; toothless -Difficult to understand and ambiguous -Refers to seven core subjects: Organizational governance, human rights, labor practices, environment, fair operating practices, consumer issues, and community involvement & development -US, India, and three other countries voted against its implementation -Asian countries use it more -Non-certifiability means 26k hasn't propagated through coroporate supply chains, as ISO 9000 has -Influence has been more in its influence in national and regional organizations, such as European Commission, Japan, and China

MSCI: Using Ratings to Build Indexes

-MSCI index methodology is typical of ESG indexes composed of stocks which are a subset of those in a benchmark index -Run negative screens on companies with stocks in parent index -Run positive screen for companies with the highest ESG ratings comprising 25% of the market cap in each sector and region of the index

Sustainalytics

-MSCI's arch-rival in global ESG risk ratings -Morningstar began incorporating its ratings into mutual funds and ETF ratings -Calculates a company's "Beta" from the average exposure to each ESG issue in the company's industry sub-sector -Also fudge factors called "Qualitative Overlay," "Correction Factor," and "Manageable Risk Factor." Latter is an adjustment recognizing some ESG risks can be managed, but others can't Advantages & Disadvantages: -Mandates comparing a company only to its industry near-peers. Apples to apples, but no way to compare companies in different industries -Methodology may give undue significance to small differences in industries where companies have very similar business models, or differentiate by geographic concentration (e.g, cable TV) -Some companies may have no industry peers Final ratings are a measure of unmanaged risk

Classifying and Measuring the Performance of Socially Responsible Mutual Funds

-Morningstar classifies funds as ESG or not by only their prospectus -Added two new factors to typical Fama French model: TMB (top-bottom) - the difference between the returns of stocks of companies ranked in the top third and bottom third by five SRI criteria (Positive beta on average) AMS (accepted-shunned) - the difference between the returns of stocks of companies commonly accepted by SRI investors and the returns of stocks of companies they commonly shun (e.g. alcohol and oil). (Negative beta on average) The two factors represent the common criteria for classifying funds as SRI If the betas of both AMS and TMB are positive, can be considered sustainable High TMB stocks add alpha High AMS has negative alpha

Morningstar: What's in a Name? The Many Dimensions of Sustainable Investing

-Morningstar defines sustainable investing as a long-term approach that incorporates ESG

B Lab

-Non-profit administering an international roster of B Corporations - B corporations /= benefit corporation, although some companies are both. Benefit corporations are allowed, under special laws in some states, to incorporate social goals as well as profit in their charter, while still fulfilling fiduciary duty -Companies accrue ratings on B Lab Impact Assessment, but certification itself is binary -2,500+ companies B Corps

Sustainability Accounting Standards Board (SASB)

-Non-profit which sets financial accounting standards for sustainability-related measures -ESG counterpart to FASB -Not required compliance yet -Not that many companies have taken it up -Bloomberg was chairman at one point

GIIN: The State of Impact Measurement and Management Practice

-Not a single country is on track to meet its climate commitment from NSDG & Paris Accord -IMM (Impact measurement and management) -Impact investors spend ~12% of their total budget on IMM activity (25% of which data collection and 24% reporting) and 25% of their time -Majority of respondents (2/3) targeting market rate returns when rest were below -Investors believe there has been progress in the field

Trucost

-Now owned by S&P Global -Specialist in environmental analysis and reporting -Analyzes risks for clients with AUM of $20+ trillion

PRI and SDGs

-PRI was begun by UN but is now independent, self-governing NGO -SDGs overseen by UN agency. Only countries are committed to them by treaty. Companies, NGOs, and non-profits can and do adopt them voluntarily -UN PRI membership implies support of the "ESG" elements of the SDGs -PRI represents 80% of the world's estimated $100 trillion in liquid invested assets

CalPERS Corporate Governance Focus

-Poor performers that have been targeted for activism by CalPERS -Post-addition returns outperformed the S&P 500 by 8.1% while pre-addition returns under performed by 97.7% -Within 180 days, excess return of 18.17%

Qualifying for the Proxy Vote

-Putting shareholder resolution(s) on meeting agenda dependent on individual company by-laws -Proxy statement includes info on it -Companies can challenge resolutions to SEC before finalizing proxy ballot -Some resolutions meant to send a message rather than actually constrain management -Some resolutions are non-binding Costs: Shareholder communication, attorney fees, and perhaps publicitly

Corporate Governance, Reputational Risk, and Why ESG Matters

-Responsible Investor had a NY conference on sustainable finance -Two main strategies to engage change are divestment and engagement -Active ownership through engagement is the best way to push for change -More disclosure is a good thing for ESG investing, but companies are typically opposed to releasing it -Firms with long term plan on ESG factors tend to outperform with lower volatility -Class-action lawsuits tend to lower returns on damages that are already done -More disclosure could lead to less litigation -Litigation in US has led to some equitable outcome (more than EU) but is very expensive and not an ideal allocation of resources -ESG will help investors examine exposures to various risk factors

Bart Houlihan / B Lab

-Shift from shareholder capitalism to stakeholder capitalism -When selling a company, had to maximize shareholder value according to law -Need to engage the private sector to drive substantial impact -Demonstration effect nonprofit: top companies (B Corps) serve as a model to follow -B Corp Certification is to business what Fair Trade is to coffee or LEED is to a building. About the entire business as a whole To get certified: 1. Take and pass an impact assessment which measures the impact on all stakeholders (consumers, environment, employees, etc). The very difficult challenge that in itself can serve as a roadmap. Need an 80 out of 200, only 40% pass and the average is a 50. 2. Rewrite corporate governance charter to include the impact of stakeholders, instead of only shareholders. Harder for corporations (can't just rewrite charter). Thus, invented the benefit corporation style 3. Must be transparent through a public report 3,200 + companies in 80+ countries Built inclusive movement with exclusive requirements For normal companies, it can do SRI things if it is feasible that it will help in the future. The issue is, at the exit there is no such "future" opportunities Unilever had the idea to buy B corps to buy and scale them, where they hold their values. Lowers cost of debt capital for part that is certified 250 people working on it. Lack of investment capital, which leads to a linear growth rate rather than exponential Impact assessment is free and want a lot of people on the platform. "Operating leverage" target of for every 1 b-corp, 100 on platform looking to become one B Corp is now allowed in 43 states and 4 countries 80% employees and 86% workers expect purpose from companies. Wealth transfer to younger investors Amend law of certain states/countries. Maryland was first state

Portfolio Expected Return as a Function of Standard Deviation

-Slope of the line is the Sharpe Ratio

SROI

-Social return on investment is a protocol for reporting social outcomes data to a parent network, which certifies the report for a fee -Analysis generates a "ratio" such that, for example, a 3:1 ratio means every $1 the entity spends generates $3 worth of social impact -Assumes social value can be represented by a financial value

ERISA

-The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. -Managers of retirement investment plans are fiduciaries under ERISA -ERISA imposes even stricter obligations than common-law fiduciary duty -Under ERISA, managers have a duty to act only in the interest of plan beneficiaries. This has had important implications for SRI investments in retirement plans

Risks and Costs of Socially Responsible Investing

-They have found that when returns are adjusted for risk, index-style investors give up very little by using socially responsible funds, while investors who choose actively managed funds can pay a heavy price - losing more than 3.5 percentage points of return a year. It is one of the first studies to look at socially responsible investing on a risk-adjusted basis. "Over 30 years, 3.5% a year is a huge amount," -As investment strategies got narrower, SRI investors paid a larger price in lost return. Since there are fewer SRI funds, it is difficult to get diversification to minimize risk. The problem becomes greater as investment strategies become more restrictive - limiting investments to value or small-company stocks picked by active managers, for instance

Performance of SRI Funds

-Typically about the same, maybe slightly lower returns -Better in downturns

UN PRI

-UN Secretary General convened 60 of the largest institutional investors to draft global principles for ESG investment -173 asset owners, 1,325 investment managers, 250+ professional service vendors, ~$82 trillion in investable assets -Six principles that are voluntary and aspirational

Alpha

-Value-added accounting for market risk -A measure of skill -Pure alpha has infinite Sharpe ratio -In net, zero alpha -Most managers have negative alphas, largely due to fees (80% cannot beat the market)

Role of Pension Plans

-We care so much about ERISA/pension plan investing because in 2018, 61% ($28.2 trillion) of US investment assets are in retirement plans -Total in OECD exceeds $40 trillion -1/3 in defined benefits plan, rest in defined contribution -Defined contribution not liable for investment choice participants make, but they are still held to a ERISA fiduciary standard over the options they offer

CFR 240.14 a-8 - Shareholder proposals

-When a company must include a shareholder's proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders -A shareholder proposal is your recommendation or requirement that the company and/or its board of directors take action. Should state the course you believe it should follow -To be eligible, must have continuously held $2,000 or 1% of companies securities for at least a year -One proposal per person and must be less than 500 words long -Company can exclude if it has a problem and notified the issuer of it -You or a representative must be physically present to present it at the meeting -Proposal cannot result in the company breaking the law -Typically recommendations vs binding -Cannot be a personal interest not held by shareholders as a class -Has to be relevant (affect operations that account for >5% assets or sales/earnings) -Cannot conflict with one of the company's own proposals to be submitted at the same meeting -Company can disallow duplicates or resubmissions

Mamadou-Abou Sarr

-Works at Northern Trust (More than $1 trillion AUM and $10 trillion under advisement) -10% of assets in ESG -Trends: Clients more likely to embrace ESG & do passive/factor approaches -Exclusion and Best-in-class and thematic portfolios (more focused in themes like clean technologies) -Sustainable investing is an investment solution based on the philosophy that ESG analytics can complement quantitative or fundamental investment techniques so as to mitigate risks or capture new opportunities -In US talk about investment returns while in Europe begin with the environmental impact -Millenials care a lot more about ESG, but older generations are the ones with the money -If shift towards sustainability, oil companies likely to have their assets stranded -Macro themes of Climate Change, Scarcity of Resources (emphasis on water), and population dynamics -Big SASB proponent -Rise of forward looking rather than backwards looking -Buy in every sector -High ESG and high quality have 6.3% alpha over ESG laggards (12.3% vs 6.2%) -Optimize through a multi-factor model including quality and ESG rating -Similar/better outcome and decreases CO2 output/unit sales by 80%

Four for Women

1. Representation - Employs a large percentage of women throughout the company such that women are well-represented at every level. Want to see 43% women throughout each level (percent of workforce that women are) 2. Pay - Pays its employees at least enough to avoid poverty, pays equally for equal work, and has no gender pay gap (78% of companies had a pay gap favoring men) 3. Health - Supports and protects the health of employees. Higher proportion men have more sexual harassment. Look at maternity leave and healthcare. 4. Satisfaction - Provides satisfying work conditions. Companies where people are happier perform better. On average, women more satisfied with work then men.

The Efficiency Paradox

1. Since the acquisition and processing of information is costly, people engaged in these activities must be compensated, namely by some extra return on their investments a) If EMH taken literally, no such compensation could possibly exist b) In that case, no one would bother collecting and analyzing information. So there is no way that information could be reflected in prices 2. There must therefore be just enough inefficiency that, on average, the information producers are compensated for producing information 3. This compensation takes the form of extra return, typically earned by analyzing correctly the raw information and acting fast upon the information uncovered.

The Stages of Sustainable Investing

1.0 - SRI Era: Business involvement, exclusions, values over investment thesis 2.0 - Integration Era: Greater company disclosure, surge in new ESG data sources, historical datasets 3.0 - Materiality Era: Across asset classes, targeted at relevancy to business models, AI and forward looking We are in 3.0

Duty of good faith and fair dealing

A duty that is implied in some contractual relationships, requiring the parties to deal with each other fairly, so that neither prohibits the other from receiving the agreement's benefits.

Duty of Candor

A duty to disclose material facts; esp., a duty of a director seeking shareholder approval of a transaction to disclose to the shareholders all known material facts about the transaction.

Fiduciary

A person who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence, and candor.

Duty of Loyalty

A person's duty not to engage in self-dealing or otherwise use his or her position to further personal interests rather than those of the beneficiary.

Negative Screening

Constrain security selection to those which avoid a defined negative social impact Ex) Might screen out any company with oil exposure

Divestment

Divestment is a large-scale, socially led movement to eliminate investments based on objections from investors or community members. Where the other exclusionary investing tactics we've described work on an individual level, divestment takes place on a bigger scale—and therefore can lead to greater change in a shorter time

Factor-Based or Thematic Investing

Factor-based/thematic investing is another type of inclusionary investing that can focus on a narrower range of sustainability themes—such as alternative energy, environmental services, or sustainable agriculture. It's important to keep in mind that these investment strategies are meant to enhance an already-diversified portfolio. Because their strategies are so focused on a particular industry or theme, they are too risky to act as stand-alone investments

Positive Screening

Favor, or constrain selection to, those securities which meet defined criteria for inclusion in the SRI portfolio Also called inclusionary investing Ex) An "environmental" SRI fund would look for securities that represent renewable energy investment, among others

Modern Portfolio Theory

For risky assets: maximize return for a given level of risk (mean-variance frontier) Invest in both risky assets and risk free in some proportion Model suggests investors will want to hold the tangency portfolio

Universe of Ratings Providors

Four largest providers (by total revenue): Bloomberg, FTSE, Russell, MSCI, and Thomson Reuters Another set are ESG-exclusive (such as Sustainalytics) Specialized providers focus on one particular element of ESG (Trucost and environmental evaluations) Most providers are for-profit companies, but some are non-profit or have unique operating models (B Lab)

Shorting Impact

Fund that shorts impact stocks has high negative alpha (due in part to high fees)

UN Sustainable Development Goals

Goals set by the UN in 2015 to be achieved by 2030 that aim at promoting development, reducing poverty and protecting the planet. Estimated cost of $2-3 Trillion annually Have an online tracker (SDG Tracker) that is similar to Wikipedia, but maintained from volunteers from Oxford University Criticized on many grounds: -Too many goals/too broad -Goals compete (sustaining GDP growth incompatible with other goals regarding environmental outcomes) -To approach buy-in from authoritarian regimes, no mention of democracy or human rights -Syrian dictator played a critical role in developing them and even promoted them during his country's civil war

Five stakeholder focused impact areas

Governance Customers Environment Community Workers Divided into goals (i.e. for workers - financial security, health, satisfaction, etc) Further broken into questions

Impact Investing

If you want to do well while also doing good for the world, impact investing aims for financial returns along with social and/or environmental value. This approach attempts to measure not only the financial gains but also the positive environmental or social effects of an investment. Some examples of impact investing include companies that deliver clean water to rural villages, companies that build low-income housing, and companies that give away a percentage of their products to those in need. One of the keys to impact investing is making sure there are clear expectations about how to measure and report on the social progress the investment is bringing

Who Makes Proposals?

In 2012, 36% was labor-affiliated

Success Percentage of Proposals

In 2015, a decline in the success percentage of proposals was reversed as the New York City pension funds led a crusade for proxy-access reform

MSCI IVA

Intangible Value Assessment MSCI's methodology for generating company scores on various SRI/ESG measures to qualify or disqualify a company (or bond) for index inclusion Step 1: Identify Key ESG Drivers of Risks and Opportunity for Each Industry Step 2: Evaluate Risk Exposure and Risk Management Step 3: Rate and Rank Each Company against Sector Peers For each issue, score its exposure and its risk management

Religious Organization

Interfaith Center on Corporate Responsibility (ICCR), main umbrella group Objectives include: -Sustainable use of resources -Human rights: child labor, human trafficking -Health care / affordable tre

Public Defined Benefit Pensions

Leaders: CalPERS ($377 billion), CalSTRS ($252 billion), NY State Common Retirement System ($200 billion), NYC Plans ($186 Billion), Florida State Board of Administration ($150 billion)

Operational Impact

Managing the day to day impact of running the business (covers facilities, purchases, employees, and governance)

Beta

Market (or systematic) exposure and a measure of market risk of an investment; related to correlation to the market Most fund managers (long only) have a beta between .9 - 1.0 The average hedge fund beta is about .3

Kurtosis

Measure of the fatness of the tails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes.

BIA Scoring Principles

Objective: Determined by Independent Standards Advisory Council Normalized: All companies can earn up to the same amount of points, regardless of scale or sector Materiality Based: Determined by materiality of topic to size/sector/market Outputs/Outcomes Oriented: More heavily weighted towards more direct indicators of impact Balanced: Across Ops and IBM, across Impact Areas

Additionality

Occurs when you contribute to something which, in some way, would not happen without your participation. Without your participation, it either would not happen at all, or it would happen at a smaller scale or at lower quality

Mutual and Other Funds

Of $11 trillion $2,500 billion in Mutual funds $7,500 billion in uncategorized Rest in other funds like ETFs, other commingled funds, etc

Evestnet Study

SRI funds had alpha during bear markets, but opposite in bull

Disclosure Questionnaire

Sensitive or potential negative aspects of the business and its operations Unweighted and reviewed independently Aligned with third party disclosure and exclusion lists (IFC, MSCI, ILO)

Shareholder Activism

Shareholder Activism: Using a minority equity stake in a publicly-traded company to influence its actions "Nontraditional" Shareholder Activism: Using minority equity stakes in publicly-traded companies to bring about social change Shareholder activists seek to impose costs on target companies greater than the perceived cost of agreeing to demands Advisory firms are often retained by institutional investors to suggest how and whether to vote their share (Institutional Shareholder Services has 60+% market share and Glass Lewis has most of the rest)

Socially Responsible Investing

Socially Responsible Investing (SRI) is a type of security selection, for all or part of a portfolio, in which positive and/or negative screening constraints exist to achieve social as well as investment returns.

Style Analysis

Studies show that 97% of the variation in return could be explained by the funds' allocation to a broader range of asset classes

Some causes of bias & distortion in impact measurement

Survivor bias: failures don't report (especially prominent in hedge fund indexing) Subjectivity - Many impact measurements are simplistic ratings (e.g. 1 - 5 scale). Often there is a subjective element in the rating Conflicts of Interest - A conflict can arise when the rater earns fees, creating a "grade inflation" incentive so fees will continue to increase Outputs are not necessarily the same as outcomes Choice of units across diverse measures With ratings: Intra-rating consistency, inter-rating consistency Consistency of definitions over time Orthogonality of ratings (and also measurements); transparency is correlated with G, S, and E

Usury

The act of lending money at an exorbitant rate of interest

Impact Business Model

The design of a company that creates a specific positive benefit/outcome for one or more of its stakeholders May be based on product, beneficiary, particular process, activity or structure Extraordinary & contingent upon company Unique to the B Impact Assessment

Certainty Equivalent

The guaranteed income level at which an individual would receive the same expected utility level as from an uncertain income

Additionality and Impact

The initial action, which has additionality, cannot create large enough quantity of impactful outputs to achieve the SDGs. The entire chain has a larger impact. If you required additionality, chain stops after stage 3. Really high additionality likely to be smaller with higher risk and lower returns, as it is more impacty than returny.

Non-Climate Social Impact

Three popular protocols: 1. GIIRS 2. SROI 3. IRIS

"Investing in Socially Responsible Mutual Funds"

To an investor who believes strongly in the CAPM and rules out managerial skill, i.e. a market-index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainly-equivalent loss. To an investor who still disallows skill but instead believes to some degree in pricing models that associate higher returns with exposures to size, value, and momentum factors, the SRI constraint is much costlier, typically by at least 30 basis points per month. The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, i.e., investors who rely heavily on individual funds' track records to predict future performance.

Avon Letter

U.S. Department of Labor established the duty of ERISA fiduciaries to vote shares. Unless it costs too much to do so

Efficient Market Hypothesis

Weak Form: Returns are unpredictable using all the information that can be obtained by examining past prices or trading volumes. This form of the EMH says that technical analysis or "chartism" is fruitless Semi-strong Form: Returns are unpredictable using all the publicly available information. On top of past prices and volumes (which are virtually costless to acquire) this includes fundamental accounting data on the firm, quality of management, product line, patents held, etc. Strong Form: Returns are unpredictable using all relevant information,public or private.