Certificate in ESG Investing Edition 1
Impact investment
Seeks to create positive environmental or social impacts alongside a financial return.
Global Reporting Initiative (GRI)
Seeks to develop some alignment between different models for corporate reporting on ESG factors and broader narrative reporting.
Task Force on Cliamte-related Financial disclosures (TCFD)
Takes the Paris Agreement's two degrees Celcius target and tries to operationalise it for the business world. Disclose the following around climate 1. Governance 2. Strategy 3. Risk management 4. Metrics and targets
Which UK body is responsible for issuing the stewardship code?
The financial reporting Council
Single-tier board structures are seen in?
UK, US, Japan and France
When is it valid to adjust the discounted cash flow when integrating ESG into traditional financial analysis?
Valid at the level of company, sector or country.
Green bond principle
Voluntary best practices guidelines, created by investment banks to promote the integrity of the green bond market by recommending transparency, disclosure and reporting
The OECD Guidlines for Multinational Enterprises?
Voluntary principles and standards for responsible business conduct in areas suchs as employment and industrial relations, human rights, environment, information disclosure, combating bribery, consumer interest, science and technology, competition and taxation.
Sustainable investment
akin to responsible investment, but going beyond integrating ESG factors in order to limit risk to doing so in order to capture and enrourage ESG opportunities such as those presented by the transition to a low carbon economy. Active ownership is actively pursued.
ESG integration typically has three components, which?
1. Research 2. analysis 3. Decision making
Typical stages of integrated ESG assessment
1. Research stage 2. Valuation stage 3. Portfolio construction stage which leads to investment decision
Three main motives for integrating ESG into the portfolio?
1. Alpha generation 2. Risk mitigation 3. non-financial
1.How many signatories were there in april 2018? 2. AUM?
1. 1961 2. US$ 82 Trillion
Whas is physical risk? name two
1. Acute 2. Chronic
A CRA rating has four characteristics?
1. Based on analytical judgement both qual and quant, using all information deemed material by the analyst. 2. Forward-looking with a varying time-horizon 3. composed of dynamic and relative measures 4. a statement of the relative likelihood of default
The original ESG portfolio construction approach is that of exclusionary screening. Other approaches include:
1. Best in class 2. active ownership 3. Thematic investing 4. Impact investing
A study from the University of Cambridge Institute for Sustainability Leadership shows that a short term shift in climate change sentiment could lose 45% om their equity portofolio value and 23% for fixed income due to what?
1. Climate Change policy 2. Technological change 3. Assets stranding 4. Weather events 5. longer-term physical impacts
MSCI ESG Hierarchy have 10 themese, which?
1. Climate change 2. Natural resources 3. Pollution and waste 4. Opportunities 5. Human Capital 6. Product liability 7. Stakeholder opposition 8. Social Opportunities 9. Corporate governance 10. Corporate behavior
PRI have highlighted three ESG engagement dynamics that it believes create value, which?
1. Communicative dynamics 2. Learning dynamics 3. Political dynamics
Name four external social factors
1. Controversial sourcing 2. Product liability / consumer protection 3. Social opportunities 4. Animal welfare
Name some issues with data?
1. Coverage issue 2. Data is self reported 3. infrequent
The circular economy principle, is an alternative approach to the use-make dispose economy and is based on three principles?
1. Design out waste and pollution 2. Keep products and materials in use 3. Regenerate natural systems.
Name four challenges to ESG integration?
1. Disclosure and data related challenges 2. comparability difficulties 3. Materiality and judgement challenges 4. ESG Integration challenges across asset classes
ICGN Model mandate request two areas of disclosure that are ESG-specific
1. ESG risk in the portfolio 2. Disclosure of active ownership
The Cadbury committee recommended what two things among others?
1. Every public company should have an audit committee meeting at least twice a year. (it is common today) 2. Chairman and CEO should be seperated
The UK Pension and Lifetime Savings Association published a disclosure guide recommending three things to demonstrate ESG risk and opportunities
1. Examples of where and why the manager is prepared to take either stock or sector ESG risks or where it sees opportunities 2. Quantitative or qualitative examples of material ESG factors identified in fundamental analysis and stock valuation 3. Identification of long-term ESG secular trends and themes.
ILO have 7. fundamental labour rights, which?
1. Freedom of association and protection of the right to organise 2. Right to organise and collective bargaining 3. Forced laour and abolition of forced labour 4. minimum age 5. Worst forms of child labour 6. Equal remuneration 7. discrimination
Name five stewardship codes?
1. Global - ICGN Global Stewardship Principles 2. Europe - European Fund and Asset Management Association Stewardship Code 2018 3. Hong Kong, Securities and Futures Comission Principles of Repsonsible Ownership 2016 4. UK - Financial Reporting Council UK Stewardship Code (Walker Report) 5. USA - Investor Stewardship Groud Stewardship Principles
Name 8 social megatrends
1. Globalisation 2. Automatisation and AI 3. inequality and wealth creation 4. Digital disruption and social media 5. Changes to work, leisure time and education 6. Changes to individual rights 7. Changing demographics, including health and longevity 8. urbanisation
TCFD 4. Core elements
1. Governance 2. Strategy 3. Risk Management 4. Metrics and targets
Which 6 themes are included in the Corporate Human Rights Benchmark?
1. Governance and policy commitments 2. Embedding respect and human rights due diligence 3. Remedies and grievance mechanisms 4. Performance company human rights practices 5. Performance: responses to serious allegations 6. Transparency.
Name six Internal social factors
1. Health and safety 2. Human rights 3. Labour rights 4. Freedom of association and employee relation 5. Forced labour 6. Living wage
The UK Stewardship Code sets out a list of escalation measures that acn be considered to advance engagements, which? name 7.
1. Holding additional meetings with management specifically to discuss concerns 2. Expressing concerns through the company's advisers 3. Meeting with the chair or other board members 4. Intervening jointly with other institutions on particular issues 5. Making a public statement in advance of gerenal meetings 6. Submitting resolutions and speaking at general meetings 7. Requesting a general meeting, in some cases proposing to change board membership.
When analyzing a company on human capital development, which three things should you focus on?
1. Identify required skills/compentencies to deliver on its strategy, identify gaps or shortages in the industry (war of talent) 2. How do they attract talent, and ways to develop competencies of internal employees to retain talent. 3. Develop measures to monitor its investment in human capital development and its return on investment.
Scorecards can be used to asses ESG risk and opportunity, in summary how should you develope such a scorecard? Six steps.
1. Identify sector or company specific ESG items 2. Breakdown issues into a number of indicators 3. Determine a scoring system based on what good/best practice looks like for each indicator/issue 4. Assess a company and give it a score 5. Calculate aggregated scores at issue level, dimension level (ESG level) or total score level 6. Benchmark the company's performance against industry averages or peer group.
List 6 requirements from the PRI report "How Asset Owners Can Drive Responsible Investment" which investment managers should require
1. Implement the asset owners investment beliefs and relevant investment policies 2. Integrate ESG issues into their investment research, analysis and decision-making processes 3. Invest in a manner consistent with the asset owners time horizons, undertading the key risks that mus be managed to achieve the asset owners portfolio goals 4. Implement effect stewardship processes. Dialogue and voting 5. Engage constructively and proactively with policymakers 6. Report on the actions taken and outcomes achieved.
Stewardship or Active ownership can lead to what?
1. Increase in return 2. Reduction in downside risk
Institutional investors typically reflect ESG considerations in three ways
1. Integrating ESG factors 2. Engaging actively 3. Public policy and best practice
EU'sHigh Level Expert Group on Sustainable Finance have 8 recommendations?
1. Introduce a common sustainable finance taxonomy to ensure consitency and clarity, starting with climate change 2. Clarify investor duties to extend time horizon and bring greater focus on ESG factors 3. Upgrade disclosure rules on climate change risk. 4. Investment advice, Ecolabel, SRI minimum standards. 5. Sustainable finance strandards on e.g. green bonds 6. Expand the universe of sustainable assets 7. Reform governance and leadership of companies 8. Enlarge role of three european supervisory authorities to promote sustainable finance.
The Japanese Corporate Governance code was introduced for the first time in 2015, what did it focus on? (two main focuses)
1. It discourage the maintainance of cross-shareholdings 2. Increasing independence of Japanese boards
What are the disadvantages to the cardinal approach, name two?
1. It does not work well when starting to do cross-comparisons and blend ESG factors. How do you rate 20 tonnes of more CO2 emissions versys a 10% higher literacy rate among factory workers? 2. From a practical standpoint, the cardinal approach relies on fairly high accuracy in the underlying data going into the ESG factor.
What are the pitfalls of ESG index?
1. Many performance based ESG indices can be backward looking or biased in their construction 2. Index construction methodologies need o be carefully reviewed as two indices with the same apparent scope can offer different outcomes due to the way that data is used, ESG indicators are measured an scores are created.
What are Pensions funds' ESG drivers?
1. Media and civil society 2. Beneficiaries 3. Regulators
Which strategies have the most AUM on a global scale?
1. Negative/exclusionary screening 2. ESG integration 3. Corporate engagenment and shareholder action
Industry sectors and activities that most frequently negatively impact biodiversity?
1. Pharmaceutical 2. Tourism 3. Utilities
What is tranisition risk? name 4.
1. Policy and legal 2. Technology 3. Market 4. Reputation
Diversity in boards and leadships can have what advantages?
1. Presence of women or minorities on the board have a positive relationship with firm value. 2. Diversity in the board of directors reduces stock volatility, higher profitability and firm valuations
What are the three main bodes of the stewardship principles?
1. Regular monitoring of investee companies 2. Active management when relevant 3. Voting
The UK environmental Guidelines made in 2019, 7 principles, that should be applied when collating and reporting on environmental impact?
1. Relevant 2. Quantitative 3. Accuracy 4. Completeness 5. Consistent 6. Comparable 7. Transparent
There are some attemps to make Corporate Governance Codes in the US, mainly made by the biggest firms. Name three of codes.
1. The Commonsense Corporate Governance Principles 2. The Investor Stewardship Grouås Corporate Governance Principles 3. The corporate governance Policies of the council of institutional investors.
The growth of environmental and climate policies. Name three of them?
1. The European Comissions Capital Markets Union (CMU) 2. The French Energy Transition Law 3. The UK Treasury's
Corporate failures and scandals have been a powerful driver for the formalisation of corporate governance and the development codes. Name two reports that are examples of that.
1. The Walker Review (After Financial crisis) 2. Kingman and Brydon review (Carillions failure)
What are the 7. challenges to successful ESG investing?
1. The availability of expertise 2. The quality of data, research and analysis 3. limited tools to assist with portfolio construction and management 4. difficulty of demonstrating the value-add from ESG 5. Confusion caused by different ESG approaches and the use of different termonology 6. Clarity on client needs and expectation and delivering on them 7. The rapid development of new styles of ESG investing.
What are the three main risks of climate change?
1. The risk of stranded assets 2. Growing stresses on water resources 3. Physical impacts of climate change
The UNGP consist of three pillars, which?
1. The state duty to protect human rights 2. The corporate responsibility to respect human rights 3. access to remedy for victims of business-related abuses.
Critiques of ESG integration name four?
1. Too inclusive of poor companies 2. Dobious assesment criteria 3. Quality of data 4. Potential lack of emphasis of long-term improvements
TCFD identifies two kinds of risk
1. Transition risk 2. Physical risk
The G20 Green Finance Study say that financial institutions need to combine two types of approaches to assess environmental risks?
1. Understand environment factors that may pose risk to financial assets and liabilities, and how such risk may evolve over time. 2. Translate environmental risk factors into quantitative meausures of financial risk.
PRI recommends that investors consider eight potential mechanisms to act as engaged owners in infrastructure, which?
1. Use ESG assessment undertaken during due diligence for improving profitability, efficiency and risk mangement. 2. Include material ESG risks and opportunities identified during due diligence into the post-acquisition plan of a project 3. Engage with and encourage management to act on ESG risk and opportunities 4. Define and communicate your expectations of ESG operations 5. Ensure ESG factors identified as material during due diligence are explicitly woven into asset-level policies 6. Advocate a governance framwork 7. Set performance targets 8. Make ESG information and expertise available.
Name further things you can do to escalate in stewardship? name four
1. Write a formal letter setting out concerns, first privately, later publicly 2. Seek dialogue wither other stakeholders, regulaters, banks, creditors, etc. 3. Seek governance improvemants 4. Formally add the company to the exclusion list.
If the chair is not independent it can hamper the boards ability to these five things:
1. exercise their oversight responsibilities 2. Challenge and debate performance and strategic plans 3. set the agenda 4. influence succession planning 5. debate executive remuneration
What potential features do you look for in an ESG assessment of mutual funds? Name 7.
1.A demonstration that ESG factors are featured in investment teams decision making process and corporate culture 2. An effort has been made to build ESG factor into valutation metrics, including materiality 3. There is a long-term investment horizon and low portfolio turnover. 4. Ownership policies and practices include sufficient oversight, integration with investment decision-making and transperency 5. For alternative assets, there is evidence of pursuing best practices in transparency and evaluation, with monitoring and improvement of ESG performance as relevant for portfolio companies and sectors. 6. there is a demonstrated willingness to collaborate with other institutional investors to improve company sector or market performance 7. Commitment to ESG integration can be seen across the organisation
Seven reasons why investors integrate ESG?
1.Meeting requirements under fiduciary duty or regulations 2. Meeting client and beneficiary demands 3. Lowering investment risk 4. Increasing investment return 5. Make tools and techniques avaiable to use in analysis 6. Improve quality of engagement and stewardship 7. Lowering reputational risk at a firm level and investment level
United Nations Global Compact (UNGC)
10 principles within: Human Rights Labour Environment Anti-Corruption
How much have PRI signatories growth been per annum since 2006
30%
Fried Busch and Bassen: "ESG and financial performance: aggregated evidence from more thatn 2000 emperical studies"
90% of studies demonstrate a relationship between ESG and financial performance that was not negative, with the large majority showing postitive correlation between ESG and financial performance
How can climate-related scenario analysis be used as an effective tool in portfolio management? Choose one or more A: By pricing climate risk. B: By assessing the portfolio's alignment with the Paris Agreement temperature target. C: By bottom-up analysis of individual companies in the portfolio. D: By producing standardised data for performance measurement.
A B C
The walker review led to what?
A UK stewardship Code in 2010, following the financial crisis.
Natural Capital Protocol (NCP)
A decision making framework that enables organisations to identify, measure and value the direct and indirect impacts and dependencies of companies on natural capital. It currently provides guidance for 1. Apparel sector 2. Food and beverages 3. Forest products sector Risk mitigation, sourcing, supply chain management and product design.
The International Finance Corporations (IFC) Equator Principles is know for what?
A globally recognised risk management framework, adopted by financial institutions for determining, assessing and managing environmental and social risk in project finance.
Sustainable Development Goals
A set of universal goals adopted by 150 UN member states. 17 goals in various areas such as poverty, gender equality and life below water. Goals needs to be reach before 2030. Totaling 169 sub-goals
Free Prior Informed Consent (FPIC)
A way to establish bottom-up participation, and to establish a good relationship with stakeholders in the local community and it ensures that the company is able to continue to operate without political interference or infomral prtest and disruption
A company which produces bottled water and pledges to use 50% recycled plastics is using: A. A circular economy approach. B. A natural capital approach. C. A supply chain disruption approach. D. A use, make, dispose economy approach.
A. A circular economy approach.
What impact will a positive ESG rating have on a company's cost of capital? A: A lower cost of capital B: No change to the cost of capital C: A higher cost of capital D: A more volatile cost of capital
A. A lower cost of capital
The transition to a low carbon economy is expected to open up significant investment requirements. What would likely have the most financial risk for investors? A. Early stage technology for hydro based transportation. B. Energy efficient automobile factories. C. Power infrastructure with proven renewable energy technology. D. Upgrades to buildings to bring them to suitable standards.
A. Early stage technology for hydro based transportation.
Under the fiduciary duty of pension funds in the USA, the Employment Retirement Income Security Act (ERISA) expects that pension funds: A. Engage with companies and vote at general meetings. B. Engage with companies but do not vote at general meetings. C. Are passive investors in companies and vote only on material issues. D. Are passive investors and do not vote at general meetings.
A. Engage with companies and vote at general meetings.
The CFA Institute and CFA UK define ESG integration as the: A. Explicit systematic inclusion of ESG factors in investment analysis and investment decisions. B. Exclusion of securities from client portfolios, which fall below specified minimum standards. C. Prioritisation of ESG factors ahead of all other client considerations during the investment process. D. Requirement to refer to ESG factors at all stages of the investment process.
A. Explicit systematic inclusion of ESG factors in investment analysis and investment decisions.
Which comment about a typical quantitative approach to ESG analysis is correct? A. Factors such as value and growth are integrated alongside ESG factors. B. The data set focuses on an individual company assessment. C. The research stage will only include internal proprietary data. D. The dataset tends to be smaller than that used by a fundamental adviser.
A. Factors such as value and growth are integrated alongside ESG factors.
Impact investment offerings of small to medium size are generally most appropriate for: A. High net worth individuals. B. Large institutional asset managers. C. Pension funds. D. Retail investment funds.
A. High net worth individuals.
Which of these ESG service providers does not produce company ESG ratings? A. Real Impact Tracker. B. Inrate. C. Thomson Reuters. D. MSCI.
A. Real Impact Tracker.
What is the result of an analyst failing to correctly model the risks and opportunities associated with ESG? A. Systematic underestimation of high ESG performans and overstimation of ESG underperformers B: SYstematic overstimation of both high ESG performers and ESG under performers C: Systematic underestimation of both high ESG performers and ESG underperformers D: systematic overstimation of high ESg performers and underestimation of ESG underperformers
A. Systematic underestimation of high ESG performans and overstimation of ESG underperformers
Lemon publicises on its website and in its annual report that it regularly performs audits across its operations to ensure compliance with the International Labour Organisation (ILO)'s International Labour Standards. Which of the following actions would be a breach of the Standards? A. Taking a pro-union stance while negating the right of employees to negotiate individually. B. Providing equal remuneration for equal work. C. Abolishing child labour even though that would generate jobs. D. Publishing a policy against discrimination in employment or occupation.
A. Taking a pro-union stance while negating the right of employees to negotiate individually.
Which study best highligt the importance of appropriate governance to enterprises? A: A meta study by Friede, Busch and Bassen has shown that the majority of studies showed a positive correlation between governance and corporate financial performance. B: The CFA Institute's 2017 ESG survey showed that governance has the strongest correlation with company margin growth. C: Enron's case provides evidence that governance is simple and failures usually link to one single factor. D: Bernile, Bhagwat and Yonker's 2017 study concludes that board diversity adds to governance complexity, thus destroying company value.
A: A meta study by Friede, Busch and Bassen has shown that the majority of studies showed a positive correlation between governance and corporate financial performance.
What is an indirect environmental impact of a paper company cutting trees and transporting them to is production plant? A: Carbon emissions from the haulage lorries B: A natural regulator of carbon dioxide is destroyed C: Deforestation D: local species are disturbed
A: Carbon emissions from the haulage lorries
Which of these investment approaches would be most suitable for an investor who wants to ensure that their personal, social and moral views direct the investment decision? A: Ethical investing B: Thematic investing C: Impact Investing D: Responsible investing
A: Ethical investing
Which of these least reflects how qualitative ESG data is used in company analysis? A: To adjust a valuation B: To add an opinion to an investment thesis C: To modify a financial model D: To determine the value at risk for the company
A: To adjust a valuation
Corporate governance comes down to what two things?
Accountability and alignment
United Nations Framework Convention on Climate Change (UNFCCC)
Aims to stabilise greenhouse gas emissions to limit man-made climate change. Paris Agreement are within UNFCCC
Model Mandate is what?
An initiative whereby more long-term thinking could be embedded into investment contracts. (especially important for pensions schemes)
What is direct impact (Environmental)?
An organisations's activities directly affect biodiversity. E.g. degraded land is converted for the benefit of production activities, toxic materials are released etc.
Central bank support of Trade Finance and Corporate Banking standards is intended to have what effect? A. Encourage banks and insurers to divest from companies with high carbon emissions. B. Enhance the approaches taken by banks and insurers to managing financial risks from climate change. C. Keep inflation within target range. D. Support quantitative easing.
B. Enhance the approaches taken by banks and insurers to managing financial risks from climate change.
Alex is a corporate bond analyst at TBD Investment Management and is responsible for a £4 billion portfolio of utility bonds with a range of credit ratings and ESG scores. He has been directed to engage with all the utility companies, whose bonds TBD holds, on their plans to reduce carbon emissions. Using the PRI's guide for ESG engagement, Alex should start with the A. Largest holdings with high ESG scores. B. Largest holdings with low ESG scores. C. Smallest holdings with low credit ratings. D. Smallest holdings with high ESG scores
B. Largest holdings with low ESG scores.
What are the three parts of the Triple Bottom Line? A. Ecological, Social and Governance. B. Social, Environmental and Financial. C. Ecological, Governance and Financial. D. Social, Financial and Governance.
B. Social, Environmental and Financial.
Caroline runs a portfolio, which screens out securities with low ESG scores from the benchmark index. She then reweights the portfolio with the remaining securities according to their market capitalisations. To address tracking error, she runs a portfolio optimisation programme. Has the tracking error issue been resolved? A. No, she should apply a strong ESG tilt to the portfolio. B. Yes, but the portfolio is now overweight securities that correlate with omitted securities. C. Yes, the removal of a small portion of securities from the benchmark will not impact relative performance in the long run. D. Yes, this strategy generally outperforms its benchmark when the excluded securities underperform.
B. Yes, but the portfolio is now overweight securities that correlate with omitted securities.
Which comment best reflects the inclusion of bad actor companies which have poor ESG scores in ESG mutual fonds? A: Bad actors are never included B: Bad actors are rarely included C: Bad actors are often included D: Bad actors will always be included
Bad actors are often included
Stewardship are beneficial because?
Because they enhance shareholder value and support investors in the execution of their fiduciary duty. and it allows for investors and investees to learn from each other and to build relationship.
A fund has signed on to the UN global compact principles and the PRI. His investment strategy will need to: A: Avoid companies which do not adhere to task force on climate related financial disclosures guidelines B: Screen the portfolio on environmental issues C: incorporate ESG issues into the investment process D: Investin in companies which adhere to human rights principles
C & D
What are the three ESG engagement dynamics highlighted by the PRI as creating value? A. Political dynamics, Financial dynamics and Learning dynamics. B. Learning dynamics, Communicative dynamics and Response dynamics. C. Communicative dynamics, Learning dynamics and Political dynamics. D. Response dynamics, Political dynamics and Financial dynamics.
C. Communicative dynamics, Learning dynamics and Political dynamics.
Sharon is the Chief Investment Officer of BCM, a boutique asset manager that primarily invests in UK equities. BCM has a small stake in RTC media company which has not been efficient in removing terrorist related content circulated on its social networking website. Since BCM's resources are limited, Sharon decides to join the Investor Forum, which will allow her to: A. Avoid direct interaction with RTC. B. Benefit from the Investor Forum's advisory services. C. Draw investor attention to RTC's terrorist related content. D. Initiate a joint resolution to gain control of RTC.
C. Draw investor attention to RTC's terrorist related content.
Which of the following indices would provide a benchmark for an ESG real estate investor? A. FTSE4Good. B. MSCI ESG. C. GRESB. D. S&P ESG.
C. GRESB.
What positive effect can the globalisation of economies have on business models? A. Dependence on one or two efficient countries to supply an industry globally. B. Increased cross-border movement of goods and services. C. Increased efficiency and lower costs. D. Offshoring to developing countries can cause an industry to disappear in a developed country.
C. Increased efficiency and lower costs.
What is the best way a company's Board can prevent excessive executive remuneration and keep executives accountable to shareholders? A. Align executive pay to industry standards. B. Avoid remuneration which vests over a several year period. C. Link pay to company Key Performance Indicators. D. Vote for regular executive pay increases.
C. Link pay to company Key Performance Indicators.
What is the best way a company's Board can prevent excessive executive remuneration and keep executives accountable to shareholders? A. Align executive pay to industry standards. B. Avoid remuneration which vests over a several year period. C. Link pay to company Key Performance Indicators. D. Vote for regular executive pay increases.
C. Link pay to company Key Performance Indicators.
The correlation between positive ESG factors and financial performance is most commonly observed to be: A. Negative. B. Close to zero. C. Positive. D. Highly variable.
C. Positive.
What corporate governance practice should be included in the process for directors of a company to be made accountable to shareholders? A. Automatic rollover of the financial auditor's services each year. B. Independent directors made accountable to executive directors. C. Review of the accounts by the Board at the Annual General Meeting (AGM). D. Setting executive remuneration in line with industry standards.
C. Review of the accounts by the Board at the Annual General Meeting (AGM).
Given that an analyst is able to judge the materiality of an ESG factor, which of the following is true? A. It will then be possible to assess the level of impact of the ESG factor. B. Other analysts with the same data will make the same materiality judgement. C. The interaction of the ESG factor with financial performance will still be uncertain. D. Cultural factors are unlikely to play a part in their judgement of materiality.
C. The interaction of the ESG factor with financial performance will still be uncertain.
What are the advantages of using mapping techniques when comparing two portfolios for ESG risk? A. Both portfolios can be shown on the same map. B. Increased ESG disclosure is making mapping more uniform. C. The materiality aspect of mapping is standardised. D. Specific elements of E, S, and G can be compared across sectors.
C. The materiality aspect of mapping is standardised.
Why do most corporate governance codes require audits? A. To guarantee there is no fraud in a company's financial statements. B. To provide a detailed list of accounting anomalies to shareholders. C. To provide an independent review of financials prepared by management. D. To verify the financials of all subsidiaries of a company
C. To provide an independent review of financials prepared by management.
Before an engangement takes place, what should you do? A: Arrange a pre-meeting call with company IR B: Contact the investor forum C: Establish clear objectives D: request a meeting with the chairman of the board
C: Establish clear objectives
What do corporat governce structures in France and the US have in common? A: Chief Executive and Chairman of the Board are typically one person. B: National corporate governance codes. C: Statutory auditors in addition to independent auditors. D: Two-tier boards.
Chief Executive and Chairman of the Board are typically one person.
Deutsche Bank study, Sustainable iNvesting: Establishing Long-term Value and peromance concluded what?
Companies with high ratings for ESG factors had a lower cost of capital in terms of debt and equity and market rated them as lower risk. Companies highly rated for ESG factors outperformed the market.
Why do US as the only country in the world not have a Corporate Governance Code?
Corporate law is a matter for the states, so there is no scope for the federal to set any kinds of rules. This has actually also led to a race to the bottom for company standards between the states.
The physical impacts of climate change are most likely to be identified as a key ESG driver for which form of institutional investor? A. An actively managed mutual fund. B. A life insurance company. C. A pension fund. D. A property and general insurance company
D. A property and general insurance company
Natasha completes a review of a large UK based oil company and assigns it an improving ESG score because she is impressed by the steps it is taking to meet the Paris Agreement. Nevertheless, she is concerned about the industry's long-term outlook and potential for stranded assets and increased cost of capital. What action should Natasha reflect in her valuation of the company? A. Adjust her discounted cash flow (DCF) model to reflect a higher cost of capital. B. Adjust her discounted cash flow (DCF) model in later years to reflect write offs for stranded assets. C. None, the oil price is the only real variable that matters. D. Adjust her discounted cash flow (DCF) model to reflect a higher cost of capital and write offs for stranded assets in later years.
D. Adjust her discounted cash flow (DCF) model to reflect a higher cost of capital and write offs for stranded assets in later years.
Which of these represents the internalisation of an externality? A. Dumping landfill. B. Forced Labour. C. Excessive executive pay. D. Carbon taxes.
D. Carbon taxes.
Chang Ying runs an equity portfolio using ESG integration techniques which looks at E, S, and G independently. To reduce the downside tail risk of the portfolio whilst preserving the largest investable universe possible she could avoid: A. All companies with low E scores. B. All companies with low G scores. C. Companies with exposure to coal fired generation activities. D. Companies whose G score reflects insufficient financial oversight.
D. Companies whose G score reflects insufficient financial oversight.
Which of the following factors will be higher for alternative investments than for other financial investments? A. Correlated returns. B. Liquidity premium. C. Reporting obligations. D. Direct investment effect.
D. Direct investment effect.
Justin would like to estimate the carbon footprint of each of the companies. Which of the below should he ignore? A. Emissions by the agricultural production of the outsourced flour producers in Company A. B. Emissions by the trucks which deliver purchased chocolate paste to clients of Company B. C. Emissions by employers of Company A when they fly to Yemen to conduct a supplier audit. D. Emissions saved by the CEO of Company B flying on a commercial plane rather than on a private jet.
D. Emissions saved by the CEO of Company B flying on a commercial plane rather than on a private jet.
Which comment on the data included in ESG integration databases is most accurate? A. ESG data must be audited to be valid. B. Input data across similar asset classes is consistent. C. Data outputs will correlate with data from other ESG databases. D. Incomplete ESG data used can be material.
D. Incomplete ESG data used can be material.
77. An ESG portfolio in government bonds is most likely to drive allocation towards: A. High yielding, high volatility bonds. B. High yielding, low volatility bonds. C. Low yielding, high volatility bonds. D. Low yielding, low volatility bonds.
D. Low yielding, low volatility bonds.
What name is given to a company's failure to manage risk which is manageable? A. Management decomposition. B. Management exposure. C. Management risk. D. Management gap.
D. Management gap.
How are agency, alignment and executive pay interrelated in corporate governance? A. Corporate governance requires management to be agents when aligning executive pay. B. Corporate governance requires agents to determine whether executive pay is aligned with the market. C. Management remuneration package should be aligned to the function or role of management as agents responsible to their Board. D. Management remuneration package should be aligned to the function or role of management as agents responsible to their shareholders.
D. Management remuneration package should be aligned to the function or role of management as agents responsible to their shareholders.
Reporting attribution of returns resulting from ESG integration is likely to be most accurate when: A. A variety of ESG evaluation techniques are used. B. An asset manager reports stewardship activities in a detailed manner. C. ESG is fully integrated into the investment process. D. The effect of removing one sector from a portfolio is measured.
D. The effect of removing one sector from a portfolio is measured.
Which of the following ESG index providers specifically considers governance? A. Bloomberg. B. FTSE Russell. C. MSCI. D. Thomson Reuters.
D. Thomson Reuters.
Which of these is not a common use for ESG data sets? A. To input into future scenario models. B. To guide practice at regulator level. C. To inform government decision making. D. To prepare company financial reports.
D. To prepare company financial reports.
CBT currently has 10 individuals sitting on its board, 3 of whom are independent. The Chairman is the former CEO who stepped down last year. Patrick believes that the Chair cannot be considered as an independent member of the board. He schedules an engagement meeting with the Chair to discuss the matter. What could be the most favourable outcome from a governance perspective? A: The Chair steps down and the CEO assumes the chairmanship, and one of the independent directors becomes the lead independent director. B:The Chair steps down and remains on the board, and one of the existing independent directors is elected Chair. C: An additional independent director is added to the board to increase the level of independence. D: The Chair steps down from the Board and the Chair role, and a newly-elected independent director is appointed Chair.
D: The Chair steps down from the Board and the Chair role, and a newly-elected independent director is appointed Chair.
Which of the following sectors have the greatest risk of increased insurance cost due to physical climate change? A: Construction and materials B: Food and beverage C: Media and technology D: Travel and leisure
D: Travel and leisure
Vincent and Michelle discuss the relative merits of a carbon tax scheme and an emissions trading scheme (ETS). While they disagree on which is preferable overall, they at least agree that: A an ETS and a carbon tax are both market-based instruments. B an ETS generates less revenue for the government than a carbon tax. C an ETS cannot be structured to keep the price of emissions falling too low, while a carbon tax may keep prices artificially high. D an ETS incentivises industries to strictly limit emissions to a certain level, while a tax does not.
D: an ETS incentivises industries to strictly limit emissions to a certain level, while a tax does not.
Kolbel and Busch Link between ESG, alpha and the cost of capital
ESG performance lowers companies' cost of capital, but the effect on alpha stays neutral. Suggest to look for ESG momentum for finding alpha, or integrate ESG in markets that are not yet efficient.
The international corporate governance network (ICGN)
Focus on governance. Key guidance developed are: Global Stewardship Principles Global Corporate Governance Principles The Model Mandate
What is the Corporate Governance Code? and which 3 recommendations did it give?
From 1992. Code was based on the Cadbury Report, in the wake of the BCCI and Maxwell Scandals. 1. The CEO and chairman of companies should be seperated 2. boards should have at least three non-executive directors, two of whom should have no financial or personal ties to executive. 3. Each board should have an audit committee composed of non-executive directors.
Two-tier board structures are seen in?
Germany, The Netherlands, Scandinavia and China
Which focus do Japans government pension fund focus on?
Governance
Why is it important to assess the effectiveness of the corporate governance system?
It gives investors insight into the accountability mechanisms and decision making processes that support all critical decisions impacting the allocation of investors' capital
The United Nations Guiding Principles on Business and Human Rights (UNGP)
It is a set of guidelines inplementing the UN's Protect, Respect and Remedy framework on thus issue of human rights and transnational corporations and other business enterprices. It is to prevent and adressing the risk of adverse impacts on human rights linked to business activity and contine to provide the intationally accepted framework for enhancing standards and practive regarding business and human rights.
Shadow carbon pricing
It is used to reduce a business carbon footprint. A shadow price on carbon creates a theoretical or assumed cost per ton of carbon emission. It is used to better understand the potential impact of external carbon princing on the pofitability of a project, a new business model or an investment.
Describe the UK stewardship Code
It sets out stewardship principles that investment insitutions are expected to comply with or be able to explain any adherence failures. It has been adopted across the world.
Sarbanes-Oxley
Lifted expectations for greater integrity in financial reporting and created the Public Company Accounting Oversight Board (PCAOB) as the country's audit standard setter and inspector.
The Corporate Human Rights Benchmark (CHRB)
Looks at policies, processes and practices they have in place to systematise their human rights approach and how they respond to serious allegations. Three industries: Agricultural products, Apparel, extractives.
High scoring ESG companies have a low or high beta?
Low beta = lower volatility Vice versa for low scoring ESG companies
A large US tobacco company has resisted engagement attempts by an investor forum to influence it to encourage people to quit smoking. The investor forum has now put an item on the upcoming AGM agenda proposing a new set of board members. The current board has reviewed its position and decides it: A. May seek a ruling from the Securities and Exchange Commission (SEC) to have the item removed from the agenda. B. Must leave the item on the agenda. C. Should make the agenda public before the meeting. D. Should resign before the AGM.
May seek a ruling from the Securities and Exchange Commission (SEC) to have the item removed from the agenda.
Alignment and the agency problem means?
Owners need to ensure that there are alignmen between their goals and the agents goal. Can be done through KPI's and executive pay with incentives.
Socially responsible investment (SRI)
Positive or negative screening strategiesfor moral or ethical reasons.
International Labour Organisation (ILO) aims at what?
Promoting opportunities for women and men to obtain decent and productive work, in conditions of freedom, equity, security, and dignity.
Article 173-VI in France focus on what?
Requires both fund managers and asset owners to describe how they incorporate ESG factors into their investment strategy across all asset classes. Largest firms must also describe how their investments support energy transistion
what are on of the challenges for effective engagement?
Resources at investment firms. There has been an increase in engagement but not neccesarily in quality.
Framworks for materiality
SASB Global Reporting initiative (GRI) IIRC MSCI Sustainalytics
Company vehicles
Scope 1
Fuel combustion
Scope 1
Fugitive emissions
Scope 1
Purhcased electricity
Scope 2
Business travel
Scope 3
Employee commuting
Scope 3
Purchased goods and services
Scope 3
Waste disposal
Scope 3
Use of old products
Scope3
What is the most precise method for fund screening? A: GICS 15 screening B: MSCI Data C: Share of company reveneues as agreed with the client D: Standard industry classification
Share of company reveneus as agree with the client
United Nations Principles for Responsible investment (UN PRI)
Six principles: 1. Incorporate ESG issues into investment analysis 2. Will be active owners 3. Disclose on ESG issues 4. Promote acceptance and implementation of the principles 5. Work together to enhance effectiveness 6. We will each report on our activities and progress torwards implementing the principles
Describe stewardship
Stewardship is the process of intervention to make sure that the value of the assets is enhanced over time or at least does not deteriorate through neglect or mismanagement.
Thematic investing
Strategy which focus on a trend within ESG or sustainable investment
Ethical investing
Subset of SRI, individual or insitutitions own ethical preferences
The Caparo and Polly peck scandals led to what?
The fist Corporate Governance Code in the UK in 1992. Made by the Cadbury Committee
What is an important conclusion for ESG portfolio construction?
The higher the correlation of the assets one can choose from, the bigger the potential to overweight good assets versus bad assets while not compromising too much on expected risk return
What is indirect impact (environmental)
The impact is caused by parties in an organisations supply chain. E.g. imports of fruits, production of cotton t-shirts etc.
The UK Government updated its publication of Environmental Guidelines in January 2019, what does it say?
There is a direct befefit to businessess that measure and report their environmental performance in gaining a better understanding of exposure to the risks of climate change and to help strenghten its green credentials in the marketplace. The guide emphasises the use of environmental key performance indicators(KPI) to capture the link between environmental and financial performance.
In what sence are ESG considerations non-financial
They are difficult to value precisely and difficult to time.
What are social mega trends?
They are long-term social changes that affect governments, societies and economies permanently over a long period of time
Credit rating agencies (CRAs) focus mainly on what?
They typically ignore E & S, and focus more on G. They focus on financial, regulatory, and legal factors
Responsible investment
This term indcates ESG factors are taken into consideration in the investment process, but typically to mitigate risk with a focus purely on finacial reutrn
Which big case in Holland led to changes in responsible investment in the pension world?
Zembla exposed pension funds invested in cluster mines in Holland.
Which of the following challenges can auditors face in preventing fraud in company accounts? i. Auditors may be misled by management. ii. Auditors rely to a great degree on the accuracy of a company's internal accounting system. iii. Audits are based on samples and not all figures are reviewed. iv. Only segments of a company's business that are deemed material are reviewed.
i, ii, iii and iv.
Greenbury report led to what?
increasing visibility of remuneration structures and transperency over the KPIs that drive performance pay
The polluter pays principle
the party that pollutes is held responsible for covering the costs of its impacts
